Table of Contents Page I Executive Summary The Securities and Exchange Commission (the SEC or the

I Executive Summary 1 Commission) filed a record 807 enforcement actions in fiscal

II Significant Enforcement Division Developments 3 year 2015 52 more than it filed in 20141 The Commission

A Change in Commissioners 3 instituted 507 actions against individuals and entities seeking

B The SECrsquos Use of Administrative Proceedings 3 sanctions for alleged violations of the federal securities laws C Admissions of Liability in Settled Cases 5 reflecting an increase of nearly 23 over 2014 and 486 D Grants of ldquoBad-Actorrdquo Waivers 5 over 2013 2 The remaining 300 actions consisted ofE Update on the SECrsquos Whistleblower Program 7 follow-on actions seeking industry bars against convicted F Focus on Cybersecurity 7 enjoined or otherwise ineligible individuals and enforcement G Insider Trading in the Wake of United States v Newman 8 actions against issuers who failed to comply with theH Focus on Compliance Officers 9 reporting requirements of the federal securities laws

III Selected Judicial Developments 10 Certain of the enforcement actions brought in 2015 were

A Koch v SEC 10 cases of first impression including one against a ldquoBigB Montford v SEC 11 Threerdquo credit ratings agency for allegedly fraudulent conduct C SEC v Caledonian Bank 11 in its rating of certain commercial mortgage-backedA United States v Litvak 12 securities which as we reported in our Securities

IV Selected Significant Investigations and Cases 13 Enforcement 2015 Mid-Year Review (Mid-Year Review) 3 A Investment Advisers 13 was settled on January 21 2015 another against anB Broker-Dealers 18 underwriter for allegedly overcharging retail customers in C Insider Trading 23 the primary market for municipal securities which wasD Financial Reporting Fraud 24 settled on August 13 2015 (see Section IVF below) and a E Auditors 28 third against a large financial institution for allegedlyF Foreign Corrupt Practices Act 30 violating the Foreign Corrupt Practices Act (FCPA) byG Crowdfunding 30 providing supposedly valuable student internships to family H Credit Ratings Agencies 31 members of foreign government officials which settled on

V Conclusion 31 August 18 2015 (see Section IVD below)

Securities Enforcement 2015 Year-End Review

Securities Enforcement 2015 Year-End Review Page 1

The Commission set another record in fiscal year 2015 by collecting approximately $42 billion in disgorgement and penalties a modest increase over the $416 billion it collected in 2014 While the median fine imposed on individuals in 2015 was the highest in 10 years the median fine imposed on companies was the lowest over the same period which confirms that the SEC continues to take a particularly hard line against individuals4

The record setting number of enforcement actions continues to reflect the controversial ldquobroken windowsrdquo enforcement philosophy championed by SEC Chair Mary Jo White Although some continue to express concern that the SECrsquos efforts may be leading to unfair settlements with individuals increasingly facing harsher penalties under the Commissionrsquos tough approach 5 the SEC has pointed to a reduction in enforcement activity in areas targeted by the ldquobroken windowsrdquo philosophy as evidence that the policy has had a deterrent effect For example in a series of enforcement sweeps over the last two years the SEC targeted firms that allegedly failed to abide by the restrictions on short-selling ahead of follow-on offerings in violation of Rule 105 of Regulation M The number and amount of fines levied by the SEC annually in connection with enforcement sweeps have declined each year from

2013 to 2015 For example 23 firms paid $144 million in fines in 2013 19 firms paid approximately $9 million in 2014 and six firms paid $25 million in 2015 The Enforcement Division has touted this decline as evidence that its enforcement sweeps have a deterrent effect6

The last year was notable for more than just unprecedented enforcement activity however Some of the key developments in the second half of 2015 discussed further in this review included the following

First as expected Commissioners Luis Aguilar and Daniel Gallagher left the SEC If the replacements President Obama nominated are confirmed the SEC will have its most diverse set of commissioners in its history The political interests supporting each nominee however reflect the partisan divide within the government in general Thus it seems unlikely that the new nominees would bridge the policy gaps some of which we have covered in our reviews that have resulted in multiple disputes among the commissioners

Second the SECrsquos use of Administrative Proceedings (AP) as a forum to litigate contested enforcement actions continues to be a hotly debated topic The Commission has strongly defended this practice both in the press and in a series of litigated cases while at the same time slowing

Securities Enforcement 2015 Year-End Review Page 2

its use of litigated APs against non-registered respondents in 2015

Third the Commission sought and obtained admissions in eight actions in the second half of 2015 bringing the total for 2015 to 14 admissions which is a slight increase over the 12 admissions obtained in 2014 While varied in scope and nature the admissions obtained in 2015 seemed to suggest an increased focus on demanding admissions where the alleged wrongdoing at issue interferes even unintentionally with the SECrsquos ability to regulate the securities industry

Fourth after spending most of 2015 giving broad waivers from the disqualification provisions of the federal securities laws the Commission closed out the year by granting a so-called conditional waiver in an approach that the Commission described as ldquodifferent and more outcome-focusedrdquo The conditional waiver among other things required a bank to retain a compliance consultant for a five-year period to review and monitor the bankrsquos activities as an investment manager and placement agent for private securities offerings including related policies and procedures and to make the consultantrsquos annual report publicly available This departure from past practice could signal that the Commissionrsquos days of routinely granting broad waivers are over

Fifth the SEC continued to be inundated with tips concerning alleged corporate wrongdoing as part of its Whistleblower Program while at the same time the Second Circuit ruled that the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) protect employees who are fired for disclosing wrongdoing internally instead of to the SEC These two developments could lead to increased whistleblowing and an increased risk for employers when dealing with potential whistleblowers

Sixth the SEC continued to emphasize cybersecurity instituting a series of enforcement actions arising out of the review of cybersecurity systems conducted by its Office of Compliance Inspections and Examinations (OCIE) One of the SECrsquos first enforcement actions following OCIErsquos review was instituted based on perceived weaknesses not in the respondentrsquos systems but in the systems of a third-party vendor used by the respondent

Seventh while the Supreme Court rejected the governmentrsquos request for certiorari from the Second Circuit decision in United States v Newman seemingly settling the standard for establishing a personal benefit in insider trading cases on January 19 2016 the Supreme Court granted certiorari in United States v Salman a Ninth Circuit decision that also considered the circumstances under which it is permissible to infer the existence of a personal benefit The Supreme Courtrsquos ruling in Salman will likely clarify the standard for establishing what type of personal benefit will suffice in insider trading cases

Eighth the SECrsquos aggressive institution of enforcement actions against compliance personnel was one of the issues that most divided the Commission in 2015 with Commissioner Daniel Gallagher expressing concern that such actions would disincentivize vigorous compliance activity while Commissioner Aguilar and Chair White responded that compliance officers who did their jobs competently diligently and in good faith had nothing to fear from the SEC

Ninth courts issued numerous significant rulings concerning the Commission in the second half of 2015 We highlight below rulings by the DC Circuit that held that the SEC could not apply the remedial provisions of Dodd-Frank concerning industry bars retroactively and that Section 4E of the Securities Exchange Act of 1934 (Exchange Act) does not set a jurisdictional limitation period for the SEC to bring an enforcement action after issuing a Wells notice the Second Circuitrsquos highly-anticipated decision concerning materiality in an appeal of a securities fraud conviction that while coming in a criminal case will likely allow the SEC to continue to push the envelope for what constitutes a material misstatement and a decision from the Southern District of New York criticizing the SEC for obtaining an asset freeze in connection with the collapse of a bank in the Cayman Islands

Finally this review highlights some of the more important developments and cases from 2015 relating to insider trading accounting fraud independent auditors the FCPA investment advisers broker dealers crowdfunding the financial crisis and credit rating agencies

Securities Enforcement 2015 Year-End Review Page 3

II Significant Enforcement Division Developments

A Change in Commissioners

Commissioners Luis Aguilar (Democrat) and Daniel Gallagher (Republican) left the SEC in the second half of 2015 On October 20 2015 President Obama nominated Hester Peirce a former aide to Senate Banking Committee Chairman Richard Shelby (R-Ala) and current senior research fellow at the Mercatus Center at George Mason University (a free-market-oriented think tank) and Lisa Fairfax a former member of the Financial Industry Regulatory Authorityrsquos (FINRA) National Adjudicatory Council and current George Washington University Law professor If Peirce and Fairfax are confirmed four of the SECrsquos five commissioners would be women for the first time and Fairfax would be the third African-American commissioner in SEC history7

The simultaneous departure of Gallagher and Aguilar is particularly notable because the two held sharply different views on a number of policy matters including recent enforcement actions against compliance officers (which we discuss in Section IIH below) Although it is unclear how Peirce and Fairfax will approach this and other issues the partisan interests that supported each nomination strongly suggests that they will have divergent policy views as well largely mirroring Gallagherrsquos and Aguilarrsquos enforcement philosophies

Peirce was nominated at the recommendation of the Senate Banking Committee headed by Senator Shelby She has been critical of the financial regulatory agenda promoted by Senator Elizabeth Warren (D-Mass) and other Democrats Indeed Peirce wrote Dodd-Frank What It Does and Why Itrsquos Flawed a book critiquing the landmark legislation signed in 2010 Fairfax on the other hand was championed by Senator Warren In 2011 Fairfax published a book of her own Shareholder Democracy A Primer on Shareholder Activism and Participation8

It is unclear when the Senate will hold confirmation votes on Peirce and Fairfax The Senate Banking Committee must first hold hearings on both nominees Although the confirmations of Peirce and Fairfax would result in the most diverse group of SEC commissioners in US history it seems unlikely that either nominee would change the current tenor and ideological divide within the Commission

B The SECrsquos Use of Administrative Proceedings

As we reported in our Mid-Year Review federal court challenges to the SECrsquos use of its in-house administrative court as a forum for litigating contested enforcement actions began to gain traction in 2015 These federal court successes together with the continued criticism from commentators appear to have directly led to changes to the AP process

First on September 24 2015 the SEC proposed amendments to ldquomodernizerdquo its AP process including by adjusting the deadlines to allow more time for discovery preparation for the hearing and issuance of an initial decision following the hearing and by granting the parties discretion to take limited depositions during the pre-hearing discovery period 9 While these procedural changes would alleviate some of the discovery disadvantages of APs they fall well short of providing respondents in APs with a reasonable opportunity to mount a defense particularly when viewed against those provided by the Federal Rules of Civil Procedure Nor does the SECrsquos proposal address recent district court decisions that have held that the Constitution requires that if an ALJ is going to preside over a litigated AP the ALJ must be appointed by the President of the United States the federal courts or the heads of federal departments Thus while the amendments may ldquomodernizerdquo APs the changes are by no means revolutionary

Second the SEC has begun to bring fewer cases as litigated APs For example between July and September 2015 the SEC brought only 11 of its contested cases as APs down from 40 during the same period in 201410 And it has seemingly stopped bringing litigated APs against non-regulated persons one of the most controversial aspects of its increase in APs from 2014

While proposed amendments to the AP rules and the Commissionrsquos reduced use of APs are significant developments they are not likely to stem the controversy over the SECrsquos use of APs Indeed the SEC recently received a stinging rebuke from the First Circuit in Flannery v SEC which reversed a controversial decision by the Commission that had reversed an ALJrsquos finding that the respondents in the AP had not violated the federal securities laws

Securities Enforcement 2015 Year-End Review Page 4

In Flannery v SEC the SEC alleged that two former employees of a custodian bank specializing in services to mutual funds made willful and material misrepresentations in an investor presentation and in letters to investors about an unregistered bond fund managed by the bank The fund was made up of asset-backed securities that substantially underperformed during the subprime mortgage crisis After a nearly three-week hearing the presiding ALJ found that (i) the respondents did not have ultimate authority over the documents containing the alleged misstatements and (ii) the documents themselves did not contain materially false or misleading statements or omissions The Enforcement Division appealed the ALJrsquos ruling to the Commission Chair White and the two Democratic commissioners then reversed the ALJ (over dissents from the two Republican Commissioners) finding that the respondents had committed fraud

Notwithstanding the generally deferential standard that applies to appeals from a Commission opinion the First Circuit rejected the Commissionrsquos findings concluding that the findings were not supported by substantial evidence The court noted that it would use a less deferential standard of review because the Commission had reached the opposite conclusion from its own ALJ rejected several of the Commissionrsquos factual findings and even found that the Commission had misread one of the communications at issue The court also emphasized that the SEC had not introduced any testimony from fund investors to support the position that certain statements at issue were misleading or material11 In short eight years after the conduct at issue and five years after the Commission issued an order instituting proceedings to begin an AP the First Circuit concluded that there was no evidence of fraud implicitly raising a question about the SECrsquos repeated claim that APs are appropriate because of its specialized expertise in evaluating alleged federal securities law violations

At the same time constitutional challenges concerning how ALJs are appointed continue to wind their way through the courts and could ultimately have a significant impact on the SECrsquos use of APs While the due process challenges based for example on claims that APs violate respondentsrsquo rights to jury trials have generally been unsuccessful respondents have achieved a measure of success in challenging the appointment of ALJs as unconstitutional pursuant to the Appointments Clause of Article II of the Constitution Under the Appointments Clause ldquoinferior officersrdquo or government officials

exercising significant authority pursuant to the laws of the United Statesrdquo12 must be appointed by the President the federal courts or the heads of the federal departments13 Respondents argue that ALJs are inferior officers and because they have not been appointed by the President SEC Commissioners or a federal court their appointment violates the Constitution

For example in Hill v SEC and Gray Financial Group Inc v SEC Judge Leigh Martin May of the Northern District of Georgia preliminarily enjoined the two APs finding that the SECrsquos hiring of ALJs (who exercise significant authority under the laws of the United States and their roles are specified by statute) violated the Appointments Clause because ALJs meet the Article II criteria that require appointment by the President the federal courts or the heads of federal departments14 The SEC appealed to the Eleventh Circuit which consolidated the Hill and Gray appeals and tentatively assigned them to the courtrsquos argument calendar for the week of February 22 2016

Other courts however have dismissed similar challenges as premature noting that judicial review is available at the conclusion of the administrative process For example in Bebo v SEC Judge Rudolph Randa of the Eastern District of Wisconsin dismissed a respondentrsquos action seeking to stop an AP for lack of subject matter jurisdiction finding that ldquo[i]f the process is constitutionally defective [respondent] can obtain relief before the Commission if not the court of appealsrdquo15 The Seventh Circuit affirmed on August 24 2015 and denied rehearing en banc on November 5 2015 Similarly in Jarkesy v SEC the DC Circuit ruled that district courts lack subject matter jurisdiction to entertain respondentsrsquo constitutional challenges prior to the conclusion of the AP 16 Judge Randarsquos analysis has been adopted by judges in the Southern District of New York (SDNY) including in Tilton v SEC17 Tilton is presently on appeal before the Second Circuit which signaled that it may take a different view from the Seventh and DC Circuits by staying the AP in Tilton the day after it heard oral argument in the appeal18

Securities Enforcement 2015 Year-End Review Page 5

C Admissions of Liability in Settled Cases

The SEC obtained admissions in 14 enforcement actions in 2015 mdash eight in the second half of the year The SEC still has yet to clarify its policy statements from June 18 2013 when it announced that it would demand admissions in settling enforcement actions where (1) the misconduct harmed large numbers of investors or placed investors or the market at risk of potentially serious harm (2) the alleged misconduct was egregious and intentional or (3) the defendant engaged in an unlawful obstruction of the Commissionrsquos investigative processes19 Settlements that included admissions in the second half of 2015 suggest that the SEC may be particularly focused on securing admissions where the alleged wrongdoing at issue interferes even unintentionally with the SECrsquos ability to investigate securities violations or where the alleged wrongdoing involves information that has the potential to affect a large number of investment decisions

For example on July 14 2015 the SEC filed a settled AP against an investment adviser for providing inaccurate trade data to its brokers which allegedly caused errors in the brokersrsquo books and records and in the ldquoblue sheetrdquo data the brokers submitted to the SEC The SEC claimed that the investment adviser adjusted the way its sales data system identified certain trades which caused some long sales to be erroneously shown as short sales According to the SECrsquos order the investment adviser inadvertently failed to appreciate that this adjustment would affect the data it sent to its brokers and in turn the brokersrsquo blue sheets The investment adviser admitted to the conduct and agreed to pay nearly $4493427 consisting of a civil monetary penalty of $425 million disgorgement of $214380 and prejudgment interest of $2904720

The settlement with the investment adviser was the second time in as many years that the SEC required an admission to settle an enforcement action involving unintentionally inaccurate blue sheet data The SEC had previously obtained an admission of wrongdoing on January 29 2014 from a broker-dealer for omitting trades from blue sheet data as a result of a computer error 21 Enforcement Division Director Ceresney emphasized in both settlement releases that the SEC relies on accurate blue sheet data in its regulation of the securities markets

Similarly on September 9 2015 as discussed more fully in Section IVC below the SEC filed a settled AP against BDO USA LLP (BDO) and five of its partners for allegedly ignoring red flags and issuing false and

misleading unqualified audit opinions 22 The firm admitted wrongdoing mdash the first time a public accounting firm has admitted to such conduct according to the SEC mdash and agreed to pay over $21 million to settle the claims Without admitting or denying the SECrsquos allegations the four audit partners who settled with the SEC paid a total of $65000 in monetary fines and agreed to be suspended from practicing before the SEC for varying periods of time In requiring that BDO admit wrongdoing the SEC seemed to focus on the central role audit reports play in investment decisions and thus how misleading audit reports could undermine the integrity of the securities market The SEC did not indicate why it took a different view as to the individuals

D Grants of ldquoBad-Actorrdquo Waivers

As discussed in our Mid-Year Review journalists politicians and even the SECrsquos own commissioners criticized the Commissionrsquos practice of consistently granting waivers from the disqualification provisions of the federal securities laws after multiple large financial institutions received waivers in the first half of 2015 following settlements with the Commission 23 These ldquobad-actorrdquo waivers allow defendants who are subject to certain administrative orders or injunctions or who have been convicted of specified crimes to continue to benefit from exceptions and safe harbors under the federal securities laws for which they would otherwise be disqualified such as Well-Known Seasoned Issuer (WKSI) status use of the safe harbor for forward-looking statements or use of certain exemptions under the federal securities law Supporters of waivers have generally argued that disqualification provisions are intended to protect markets from ongoing harm not punish defendants 24 while critics have complained that the waivers make certain firms ldquotoo big to barrdquo25

The SEC appeared to be continuing its prior policy of generally granting waiver requests in August when it granted a large financial institution a waiver after two of the bankrsquos affiliates settled claims that they allegedly understated the risks and suitability of investments for traditional bond investors (as discussed below in Section IVD) 26 On August 27 2015 however (now former) Commissioner Aguilar recommended that the SEC increase its use of conditional waivers which would impose certain limitations but would not fully disqualify a defendant to help dispel the notion that the breadth and severity of disqualification provisions have caused the

Securities Enforcement 2015 Year-End Review Page 6

Commission to routinely grant blanket waivers especially to large financial institutions

On December 18 2015 the SEC granted such a conditional waiver when it and the Commodity Futures Trading Commission (CFTC) settled with a large financial institution that had allegedly failed to tell clients that it was steering them to the bankrsquos own products which would allow the bank to earn higher fees As part of the settlement the bank agreed to pay a total of $307 million and made certain admissions In addition the Commission granted the institution a conditional waiver that would allow it to continue to act as an investment manager and placement agent for private funds that issue unregistered securities under Rule 506 of Regulation D of the Securities Act of 1933 (Securities Act) and would allow its affiliates to continue to conduct business under Rule 506 but subject to a number of conditions

First the SEC or CFTC can revoke the conditional waiver if the bank fails to comply with either agencyrsquos order or is the subject of any action triggering the disqualification provisions under the federal securities laws for a period of five years

Second the conditional waiver requires the bank to engage a compliance consultant for a five-year period to conduct a comprehensive review of the bankrsquos practices policies and procedures relating to its management and placement of unregistered securities under Rule 506 The compliance consultant must issue an annual report each year summarizing its findings which will be published on the Commissionrsquos website

Third the conditional waiver requires senior executives to assist in addressing identified compliance issues and certify that they have read the compliance consultantrsquos report27

The SECrsquos insistence on such terms suggests that the days of the Commission routinely granting broad unconditional waivers may be coming to an end The commentary by certain Commissioners about conditional waivers also indicates that the SEC will likely make greater use of conditional waivers in the coming months

Securities Enforcement 2015 Year-End Review Page 7

E Update on the SECrsquos Whistleblower Program

Notable whistleblower awards by the Commission in the second half of 2015 included an award on July 17 2015 of $3 million mdash the third-highest award ever under the Whistleblower Program mdash and an award of over $325000 on November 4 2015 28 In announcing the $325000 award the Commission included an admonition for future whistleblowers stating that ldquo[t]he whistleblower waited until after leaving [his employer] to come forward and agency officials say the award could have been higher had this whistleblower not hesitatedrdquo

The Commission announced a joint award of 20 of monetary sanctions to a pair of foreign whistleblowers on September 28 201529 and an award of 28 of sanctions to a separate whistleblower on September 29 201530 The announcements of these awards did not include specific amounts because monetary sanctions have yet to be collected

The SECrsquos Whistleblower Program also received a boost in 2015 from a decision by the Second Circuit regarding eligibility for anti-retaliation protection under Dodd-Frank The decision Berman v NeoOgilvy LLC deferred to the SECrsquos interpretation of ldquowhistleblowerrdquo in Dodd-Frank and held that a whistleblower could sue for retaliation under Dodd-Frank even if the whistleblower was retaliated against for disclosing information to an employer not the Commission31 The Second Circuit decision conflicts with the Fifth Circuitrsquos holding in Asadi v GE Energy that Dodd-Frankrsquos plain language only allowed an employee to sue for retaliation provisions if the employee was retaliated against for disclosing information to the SEC32

Berman could further the SECrsquos policy of encouraging internal reporting which is reflected in among other things Rule 21F-6(a)(4) of the Exchange Act which considers a whistleblowerrsquos participation in an entityrsquos internal reporting system a plus factor in determining the size of an award and Exchange Act Rule 21F-4(b)(7) which creates a 120-day ldquolook-back periodrdquo for whistleblowers who first report wrongdoing through an entityrsquos internal processes33 The look-back period allows a whistleblower to receive credit for reporting information as of the date of the internal report

Whistleblowers claiming to have been fired after reporting wrongdoing internally began bringing suits alleging violations of Dodd-Frankrsquos anti-retaliation provisions within a week of Berman For example on September 17 2015 a former branch manager at an international financial institution filed a whistleblower suit in the SDNY alleging that he had been fired after reporting a number of mortgage loans originated by unregistered loan officers in violation of federal mortgage laws34

Separately as the year came to a close reports emerged of a pending whistleblower award that could be the largest in the programrsquos history As described in Section IID above a large financial institution agreed to a $307 million settlement in December with the SEC and CFTC The actions against the bank reportedly stemmed from a whistleblower tip and based on the settlement amount the whistleblower could receive an award of over $90 million35 Even an award on the low end of the range however could easily surpass $30 million the highest award to date Such staggering awards can only boost the Whistleblower Programrsquos profile which could further increase reporting to the SEC

F Focus on Cybersecurity

In the spring of 2014 OCIE released a risk alert announcing that the SEC would examine registered broker-dealers and investment advisers to assess their cybersecurity preparedness 36 OCIE stated that its examinations would focus on cybersecurity governance identification and assessment of cybersecurity risks protection of networks and information risks associated with remote customer access and funds transfer requests risks associated with vendors and other third parties detection of unauthorized activity and experiences with certain cybersecurity threats OCIE completed its examinations on February 3 2015 and issued a report that criticized companies for failing to prevent cyberattacks notwithstanding written policies designed to prevent such attacks 37 The SECrsquos Division of Investment Management then released guidance for the protection of customer information that emphasized that broker-dealers and investment advisers should limit employee access to data employ encryption technologies and develop incident response plans38

Securities Enforcement 2015 Year-End Review Page 8

While the guidance was welcome it was arguably too general to be particularly useful much like the provisions of Rule 30(a) of Regulation S-P under the Securities Act (the Safeguards Rule) The Safeguards Rule generally requires that regulated entities adopt written policies and procedures that are reasonably designed to safeguard customer records and information However the rule does not define specific requirements for a reasonable cybersecurity program so it is possible that the mere event of a data breach is enough to show that a company lacks reasonably designed procedures Further even a large and sophisticated institution with an advanced cybersecurity policy still faces the risk of a cyberattack mdash and a potential violation of the Safeguards Rule mdash through the smaller less-sophisticated companies with which larger companies interact For example the hackers who stole customer data for 70 million of big-box retailer Targetrsquos customers in 2013 reportedly accessed Targetrsquos systems via the network of the small business responsible for Targetrsquos heating and air conditioning39

The SEC brought one of the first enforcement actions related to OCIErsquos cybersecurity review in the second half of 2015 and that action involved a third-party service provider Specifically on September 22 2015 the SEC instituted a settled AP against RT Jones Capital Equities Management Inc (RT Jones) for allegedly failing to adopt written policies and procedures reasonably designed to protect customer records and information in violation of the Safeguards Rule40 The SEC alleged that RT Jones stored sensitive personally identifiable information for over 100000 clients and other persons on a server hosted by a third-party vendor without adopting written policies and procedures for the security confidentiality or protection of that information The SEC also alleged that a July 22 2013 cyberattack left RT Jonesrsquos customersrsquo data vulnerable to theft Without admitting or denying the SECrsquos allegations RT Jones agreed to pay a $75000 civil monetary penalty Prior to the settlement RT Jones also engaged in remedial efforts by appointing an information security manager to oversee data security and protection and implementing a written information security policy

OCIE has announced that it will conduct a second round of cybersecurity reviews 41 which could lead to more enforcement actions With this additional review and the enforcement actions that are also likely to come calls may grow louder for the SEC to provide more detailed guidance on cybersecurity requirements

G Insider Trading in the Wake of United States v Newman

The Supreme Courtrsquos denial of certiorari in United States v Newman appeared to settle the debate over whether to succeed in an insider trading enforcement action where the SECrsquos only evidence of a personal benefit to the insider is the existence of a personal relationship with the tippee the SEC needed to offer ldquoproof of a meaningfully close personal relationship that generates an exchange that is objective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo42 The debate will continue for at least a few more months however as the Supreme Court recently granted certiorari in United States v Salman a case out of the Ninth Circuit that is likely to address the personal benefit standard set by the Second Circuit in Newman

The SEC may well seek to delay disposition of certain pending insider trading cases until the Supreme Court decides Salman as the SEC has felt the impact of Newman in recent cases On September 14 2015 the SEC suffered a rare defeat in an AP when an ALJ dismissed insider trading claims against Joseph Ruggieri a former trader at Wells Fargo Securities LLC ALJ Jason Patil found that although the SEC showed that Ruggieri traded on material non-public information on numerous occasions the allegations did not meet the SECrsquos burden under Newman to show that the corporate insider gave Ruggieri the information in exchange for a personal benefit ALJ Patil was not persuaded by the SECrsquos argument that Ruggieri received the information in exchange for positive feedback and instead found that it was more likely that Ruggierirsquos feedback was genuine and part of a standard practice as Ruggieri had given the corporate insider positive feedback even before being provided with material non-public information43

Newman may have also had a significant impact on the SECrsquos AP against Steven Cohen the former head of hedge fund SAC Capital Advisors LP (SAC Capital) which settled on January 8 2016 The SEC had alleged that during Cohenrsquos time at the helm of SAC Capital he failed to reasonably supervise high-performing traders Michael Steinberg and Mathew Martoma who had been criminally convicted of insider trading after jury trials The SECrsquos settlement order found that Cohen failed to supervise Martoma (Steinbergrsquos conviction was vacated after Newman for insufficient evidence of a personal benefit) ignored red flags that Martoma was engaged in insider

Securities Enforcement 2015 Year-End Review Page 9

trading and encouraged Martoma to talk to a doctor about nonpublic drug trial results to inform trading decisions

To settle the SECrsquos claims Cohen without admitting or denying wrongdoing agreed to retain an independent consultant to conduct periodic reviews of his family office firms to subject his firms to periodic SEC examinations and to be barred from supervising funds that manage outside money for two years The settlement allows the SEC to extend the time period during which Cohen must comply with these requirements in the event the Commission brings a new action against Cohen and requires any registered broker-dealer or investment advisor that retains Cohen in a supervisory capacity before 2020 to retain an independent consultant until the end of 201944

The SECrsquos AP against Cohen was perhaps the most anticipated AP in recent years and its sudden and surprising settlement which did not include a monetary penalty suggests that the Commission may have had serious concerns about its case in the wake of Newman

The continuing impact of Newman is now an open question in light of the Supreme Courtrsquos grant of certiorari in Salman The question as to which the Supreme Court granted certiorari in Salman is whether the personal benefit to the insider that is necessary to establish insider trading requires proof of an exchange that is ldquoobjective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo as the Second Circuit held in Newman45 The Ninth Circuitrsquos opinion in Salman written by SDNY Judge Jed Rakoff (sitting by designation) can be easily distinguished from Newman on its facts as it did not involve a remote tippee who lacked knowledge of any personal relationship between the insider and immediate tippee and because the personal relationship between tipper and tippee appeared to be far more meaningful than in Newman 46 Nevertheless the Supreme Courtrsquos decision may reach more broadly than the facts of either case to bring some clarity to insider trading law which could be a welcome development by all A decision in Salman is expected by the end of the Supreme Courtrsquos current term in June 2016

H Focus on Compliance Officers

The SECrsquos pursuit of enforcement actions against compliance professionals was one of the most divisive issues of 2015 As we reported in our Mid-Year Review after having typically limited enforcement actions against individuals with compliance authority to those who also had other management responsibilities or in cases of actual fraud the SEC brought claims in the first half of 2015 against individuals responsible solely for compliance and in the context of their compliance roles This sparked public statements of dissent and criticism from Commissioner Gallagher Commissioner Aguilar responded with a statement addressing the criticism and reassuring compliance professionals that the SEC was not interested in bringing enforcement actions against compliance professionals who were obeying the law and fulfilling their responsibilities Chair White added her voice to the debate on July 14 2015 assuring compliance professionals that ldquo[w]e do not bring cases based on second guessing compliance officersrsquo good faith judgments but rather when their actions or inactions cross a clear line that deserve sanctionrdquo47 And on November 4 2015 Enforcement Director Ceresney attempting to assuage the fears of compliance officers who worry they will be targeted reiterated that the overwhelming majority of the cases the SEC brings involve compliance officers who crossed a clear line by engaging in affirmative misconduct or obstructing regulators48

On August 5 2015 in an action illustrative of the types of acts that appear to result in enforcement actions against compliance officers ALJ Cameron Elliot found that Judy Wolf a former investment bank compliance officer aided and abetted her employerrsquos violation of the books and records provisions of the Exchange Act by altering documents during an SEC investigation After learning that the SEC was investigating Wolf admitted to altering her notes regarding a review of securities trades in a fast food chain restaurantrsquos stock that she did not flag for her superiors by including reports of takeover rumors that would have bolstered a conclusion that the trades were improper Although ALJ Elliot found that Wolf violated the Exchange Act he declined to sanction her because among other things he concluded that her violations were isolated and not egregious ALJ Elliot noted that some factors favored sanctions but held that Wolf was a low-level employee and sanctions would allow her employer to label her a ldquobad applerdquo and move on without examining its practices ALJ Elliot further alluded to the

Securities Enforcement 2015 Year-End Review Page 10

ongoing debate over the Commissionrsquos policy of bringing actions against compliance personnel by noting that sanctioning low-hanging fruit like Wolf could discourage competent persons from taking compliance positions49

On August 6 2015 the SEC agreed to settle claims it had brought against an investment advisory firm its CEO John P Bott II and its chief compliance officer Robert Falkenberg50 In March 2011 the SEC asked Falkenberg to provide copies of his 2010 review of the firmrsquos policies and procedures which Falkenberg allegedly told the Commission that he had conducted in February 2011 A review of the firmrsquos metadata however allegedly revealed that Falkenberg had not actually conducted his review until April 2011 and had only spent a few hours drafting his report which he never sent to the firmrsquos CEO The SEC claimed the firm had violated Sections 206(3) 206(4) and 206(4)(A) of the Investment Advisers Act of 1940 (the Advisers Act) and Rules 206(4)-2 206(4)-7 and 206(4)A-1 thereunder and that Bott and Falkenberg had aided and abetted the firmrsquos violations Pursuant to the settlement Bott agreed to pay $450000 in disgorgement to the firmrsquos clients plus prejudgment interest and Bott Falkenberg and the firm were ordered to pay civil monetary penalties in the amounts of $70000 $40000 and $200000 respectively for a total of more than $760000 Falkenberg was also required to complete 30 hours of compliance training for his alleged failure to monitor the firm by conducting an annual review of its policies and procedures

In addition to its recent actions involving compliance officers the SEC has been scrutinizing investment advisersrsquo growing use of outside CCOs For example on November 9 2015 OCIE released a report finding that several outsourced CCOs had not effectively implemented compliance programs for which they were responsible51 In its risk alert OCIE reported that ldquocertain outsourced CCOs could not articulate the business or compliance risksrdquo their firms faced or whether the firms had adopted written policies and procedures to mitigate those risks52 In other instances outside CCOs were not tailoring program templates to the adviserrsquos business meaning that the compliance materials were not applicable to the firm The SEC concluded that advisers with outsourced CCOs should review their business practices to ensure that CCOs have enough authority to implement compliance programs and policies

Even if the SEC follows through with its assurances that only compliance officers who cross a ldquoclear linerdquo will face

enforcement action the number of regulatory lines now drawn for compliance officers mdash and their new focus on outsourced compliance programs mdash makes it clear that this remains an area of heightened enforcement risk

III Selected Judicial Developments Several judicial opinions of significance to the SECrsquos enforcement program were issued in the second half of 2015 and we summarize four of the most significant opinions below First the DC Circuit held that the SEC could not retroactively apply the remedial provisions of Dodd-Frank concerning industry bars to punish conduct that occurred before Dodd-Frank was enacted Second the DC Circuit in a separate case held that Section 4E of the Exchange Act does not set a limitation period for the SEC to bring an enforcement action after issuing a Wells notice Third the Second Circuit issued a long-awaited decision in an appeal of a securities fraud conviction in Litvak that while coming in a criminal case will likely allow the SEC to continue to push the envelope for what constitutes a material misstatement Finally Judge Pauley of the SDNY criticized the SEC for its use of an asset freeze in connection with the collapse of a Cayman Islands bank

A Koch v SEC

On July 14 2015 the DC Circuit ruled in Koch v SEC that the SEC could not use remedial provisions of Dodd-Frank to punish an investment adviser for conduct that occurred before Dodd-Frank was enacted53 The SEC had instituted an AP against Donald Koch and his firm Koch Asset Management (KAM) alleging that Koch engaged in a scheme to manipulate the prices of stocks in which KAM had invested Koch purportedly instructed his broker on two different occasions in 2009 to increase the frequency of the brokerrsquos bids on stocks at the end of the trading day which had the effect of inflating the stocksrsquo prices The SEC alleged that Koch and KAM violated Section 10(b) of the Exchange Act and Section 206(1) of the Investment Company Act and requested among other things that Koch be barred from the securities industry

Prior to Dodd-Frank the SEC had the authority to bar individuals from associating with a subset of securities industry participants including broker-dealers and investment advisers Dodd-Frank however expanded the SECrsquos authority to bar individuals from associating with municipal advisors and ratings organizations a power it did not have prior to the passage of Dodd-Frank

Securities Enforcement 2015 Year-End Review Page 11

Although Kochrsquos alleged market manipulation occurred in 2009 a year before Dodd-Frank the SEC sought to bar Koch from the securities industry pursuant to its authority under Dodd-Frank

The presiding ALJ found that Koch engaged in market manipulation but only imposed a limited industry bar that barred Koch from associating with investment advisers Koch appealed to the Commission which not only affirmed the ALJrsquos findings but also expanded the industry bar imposed on Koch to include municipal advisers and ratings organizations Koch appealed the Commissionrsquos ruling to the DC Circuit which also affirmed that Koch had engaged in market manipulation but reversed the Commissionrsquos expansion of Kochrsquos industry bar The panel held that the SEC could not use Dodd-Frank to penalize Koch for conduct that occurred before the statute was enacted because Dodd-Frank did not expressly allow the SEC to apply its provisions retroactively and expanding Kochrsquos industry bar would ldquowould impair rights [Koch] possessed when he acted increase [Kochrsquos] liability for past conduct or impose new duties with respect to transactions already completedrdquo

A week after the DC Circuit ruled Commissioners Gallagher and Piwowar who had dissented from the SECrsquos order expanding Kochrsquos industry bar said in a joint statement that they were ldquopleasedrdquo with the courtrsquos holding and urged the SEC to address ldquoall impermissibly retroactive collateral bars that have been misapplied since the enactment of Dodd-Frankrdquo54

B Montford v SEC

On July 21 2015 the DC Circuit issued its opinion in Montford v SEC holding that the requirement under Section 4E of the Exchange Act that enforcement proceedings be brought within 180 days of a Wells notice (enacted with Dodd Frank) is not an enforceable jurisdictional requirement 55 Montford arose from an appeal of a final order from the Commission finding that respondents violated Sections 204 206 and 207 of the Advisors Act for among other things allegedly failing to disclose the receipt of fees from an investment manager while disclosing to customers that it was ldquoindependentrdquo and ldquoconflict freerdquo The Commission barred respondents from the securities industry required the disgorgement of $210000 and imposed civil penalties56

Respondents appealed the Commissionrsquos order to the DC Circuit raising two challenges each of which the court rejected First respondents argued that the institution of administrative proceedings more than 180 days after issuing a Wells notice violated Section 4E of the Exchange Act and required dismissal Section 4E of the Exchange Act provides that ldquo[n]ot later than 180 days after the date on which Commission staff provide a written Wells notification to any person the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent not to file an actionrdquo The deadline of Section 4E may be extended by the Director of the Division of Enforcement ldquofor certain complex actionsrdquo which the Commission submitted happened in the instant case 57 Without reaching the issue of whether the Commission properly extended the Section 4E deadline the court found that Section 4E of the Exchange Act was ambiguous as to whether its violation served to bar an action by the Commission Accordingly the court concluded that under Chevron the Commissionrsquos interpretation that Section 4E is not a jurisdictional bar was entitled to deference as long as it was reasonable which the court found it was

Second respondents argued that the Commission abused its discretion in imposing civil penalties and ordering disgorgement because in respondentsrsquo view the receipt of money was not illegal and there was no causal link between the Commissionrsquos order of penalties and disgorgement and the alleged nondisclosure The court rejected this argument too noting that the Commission has flexibility in imposing such penalties which will be upheld as long as they are reasonable

Because the Enforcement Division is generally diligent about ensuring that enforcement actions are filed within 180 days of a Wells notice (or seeking an extension from the Division Director) Montford may have limited practical impact More surprising is arguably the judicial finding of ambiguity in a statute that left little room for interpretation

C SEC v Caledonian Bank

On November 10 2015 in SEC v Caledonian Bank Judge William H Pauley III of the Southern District of New York denied the defendantsrsquo motion to dismiss an SEC complaint that defendants had engaged in unregistered sales of securities in violation of Sections 5(a) and 5(c) of the Securities Act as part of an alleged

Securities Enforcement 2015 Year-End Review Page 12

penny stock ldquopump-and-dumprdquo scheme that the SEC claimed netted them profits of $75 million According to the SEC the defendants allegedly aggressively marketed the stocks of four companies that contained few assets using a series of sham transactions to conceal beneficial ownership of the securities before offering them to the public The opinion on a motion to dismiss would likely be of limited interest if only considered for its holding

In declining to dismiss the pending case however Judge William H Pauley III aggressively criticized the SECrsquos failure to coordinate its enforcement efforts which he stated led to unintended consequences and collateral victims According to the courtrsquos opinion at the same time a team of Washington DC-based SEC attorneys had persuaded Judge Pauley in February 2015 to freeze the assets of a Cayman Islands bank that allegedly sold the fraudulent securities another team of New York-based SEC attorneys who were investigating the some of the same defendants had information showing that the bank had not sold the securities for its own account but merely acted as a broker According to the Judge Pauley the freeze order (which was predicated in part on the belief that the bank had not acted as a broker) had the effect of bankrupting the bank shortly thereafter Judge Pauley blamed the SECrsquos ldquobureaucratic siloingrdquo for causing what he described as an unfortunate and unnecessary outcome In a broader criticism of the SEC Judge Pauley stated ldquoit is hard to believe that those charged with overseeing enforcement are not monitoring activities to avoid needless duplication of effortrdquo and that ldquo[g]iven the high stakes in securities enforcement actions and in the face of a workload the SEC describes as an lsquooverwhelming burdenrsquo a self-examination may be appropriaterdquo It remains to be seen what impact the criticism will have

D United States v Litvak

On December 8 2015 in a highly anticipated ruling the United States Court of Appeals for the Second Circuit reversed bond trader Jesse Litvakrsquos conviction on false statement charges and vacated his conviction on securities fraud charges58 The panel held that the trial court abused its discretion when it excluded critical expert testimony regarding pricing in the bond market which could have bolstered Litvakrsquos arguments that his allegedly false statements were not material The panel only vacated Litvakrsquos securities fraud conviction however rejecting his central argument that the statements at issue were immaterial as a matter of law The SEC had brought a parallel civil action against Litvak arising out of the same

allegations which remains on hold pending the outcome of Litvakrsquos criminal case59

The panelrsquos decision was not a complete win for Litvak and could have broad implications for future SEC actions Litvakrsquos central defense at trial and on appeal was that his alleged misrepresentations which related to the profit he stood to make from counterparties on bond transactions were immaterial as a matter of law Specifically he argued that the statements were immaterial as a matter of law because they related to how much Litvak paid for the securities himself and had no impact on the value of the securities themselves Put another way Litvak argued that counterparties could not have considered his false statements important because they did not pertain to any objective valuation of the underlying securities

The panel rejected Litvakrsquos arguments pointing to testimony from Litvakrsquos counterparties who stated that Litvakrsquos alleged misstatements were ldquoimportantrdquo to them and that the counterparties were injured by those misrepresentations by ultimately paying more than they would otherwise have bid for the securities Even though Litvak had credibly argued that the kind of statements at issue were a common business practice that should have had no relevance to pricing the panel concluded the testimony precluded a finding that no reasonable mind could find Litvakrsquos statements material And although the decision was not written as though it broke new ground the panelrsquos approach to materiality and deference to what investors considered to be important may have a lasting impact on the way the SEC pursues investigations by putting a greater focus on gathering evidence concerning investorsrsquo expectations At the same time the courtrsquos decision that excluding Litvakrsquos proffered materiality expert was an abuse of discretion will ensure that future defendants have more leeway to argue their positions in court

In sum while the district court cannot dismiss the remaining charges against Litvak on materiality grounds Litvak will have much more ammunition to fight these charges at trial And for future defendants (in both criminal and SEC actions) this opinion is a stark reminder that questions of materiality are highly fact-specific and that no misrepresentation should be presumed to be harmless or immune from prosecution

Securities Enforcement 2015 Year-End Review Page 13

IV Selected Significant Investigations and Cases

Below we highlight some of the more notable SEC enforcement actions from the latter half of 2015

A Investment Advisers

The SEC continued its especially vigorous oversight of investment advisers in 2015 It brought enforcement actions focused on representations of investment risk and performance disclosure of conflicts of interest the Custody and Compliance Rules of the Advisers Act and disclosure of fees and expenses while signaling a particularly increased focus on private equity

1 Misrepresentation of Investment Risk and Performance

On July 31 2015 the SEC filed a settled AP against a financial advisory firm and its founder Walter F Grenda Jr The SEC alleged that Grenda made false and misleading statements to the firmrsquos advisory clients in recommending and selling investments in a hedge fund called Prestige Wealth Management Fund LP (Prestige Fund) Grendarsquos statements allegedly misled clients into believing that the investments were less risky than they actually were Grenda also allegedly borrowed $175000 from two of his clients which the SEC claimed he misrepresented would be for business purposes but which he spent on personal expenses and debts In its settlement order the SEC found that the advisory firm and Grenda violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder The SEC also found that the advisory firm and Grenda violated Sections 206(1) and 206(2) of the Advisers Act and that Grenda willfully aided and abetted Prestige Fundrsquos violations of Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder The advisory firm was censured by the Commission and had its registration as an investment adviser revoked but did not pay any financial penalties Without admitting or denying wrongdoing Grenda agreed to pay $7741091 consisting of a $50000 civil monetary penalty and $2241091 in disgorgement and prejudgment interest60

On August 4 2015 the SEC instituted a settled AP against Gold Mountain LLC an investment adviser in Iowa and its founder Gregory Bied for allegedly defrauding investors through false statements in quarterly reports

Allegedly Gold Mountain and Bied made false statements from 2012 through mid-2014 to investors in a hedge fund managed by Gold Mountain namely that the fund was achieving positive quarterly returns when in fact the hedge fund had lost around 75 of its value over that time The SEC claimed that Gold Mountain and Bied violated Sections 9(b) and 206(4) of the Advisers Act Without admitting or denying the SECrsquos findings Gold Mountain and Bied consented to an industry bar and to pay a civil monetary penalty of $200000 which will be distributed to investors61

On November 30 2015 the SEC instituted settled APs against investment adviser Alpha Fiduciary Inc (AFI) Arthur Doglione AFIrsquos majority owner and president and Michael Shea AFIrsquos vice president and business development director The SEC alleged that AFIrsquos executive summaries firm profiles presentations and advertising materials contained certain hypothetical performance information but did not disclose that this data was completely hypothetical Moreover the SEC claimed that while some of AFIrsquos materials contained disclosure language the disclosure language did not appear on the same page as the hypothetical performance data rendering it misleading The SEC also found that although AFIrsquos compliance and procedures manual required the chief compliance officerrsquos prior review and approval of any marketing materials Doglione had exercised sole authority over AFIrsquos policies and procedures Thus the SEC alleged that he was solely responsible for the review and approval of AFIrsquos marketing materials prior to their distribution to clients or prospective clients The SEC also claimed that Shea knew that some of the data was hypothetical yet still included this information in materials he sent to clients Moreover Shea allegedly provided prospective clients with a report of an existing clientrsquos portfolio which represented a 144 return without taking any steps to determine if it was representative of the performance of other AFI clients The SEC claimed that AFI Doglione and Shea violated Sections 206(2) and 206(4) of the Advisers Act As part of the settlement the parties without admitting or denying the Commissionrsquos findings agreed to censures and a total of $550000 in penalties AFI agreed to pay a civil monetary penalty of $250000 to notify existing and prospective clients of the SECrsquos order and to obtain an independent compliance consultant Doglione agreed to a civil monetary penalty of $250000 and Shea agreed to a civil monetary penalty of $2500062

Securities Enforcement 2015 Year-End Review Page 14

2 Conflicts of Interest

On July 24 2015 the SEC instituted a settled AP against investment adviser Dion Money Management LLC (Dion) for allegedly failing to disclose adequately to clients a compensation arrangement whereby Dion received payments from third parties when client assets were invested in certain mutual funds The SEC asserted that although Dion disclosed the conflict of interest it understated the maximum payment rate under the arrangements with third parties and omitted the possibility that investors would receive payments from multiple parties based on the same client assets The SEC found that Dion violated Sections 206(2) and 207 of the Advisers Act Without admitting or denying the SECrsquos findings Dion agreed to amend its disclosures to provide notice to its clients of the SECrsquos order and pay a civil monetary penalty of $50000 63

On August 6 2015 the SEC instituted a settled AP against Tri-Star Advisors (TSA) TSA CEO William T Payne and TSA president Jon C Vaughan for alleged violations of the Advisers Act The SEC alleged that TSA made investment recommendations to its clients and executed trades while charging clients a sales credit ie a percentage mark-up without disclosing the credit to clients Payne and Vaughan allegedly received 55 of the sales credit generated by each trade The SEC claimed that TSA violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and that Payne and Vaughan caused TSA to violate Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the Commissionrsquos findings the respondents agreed to pay $779149 to settle the SECrsquos claims TSA agreed to pay a $150000 civil monetary penalty Payne agreed to pay disgorgement of $142500 prejudgment interest of $323521 and a civil monetary penalty of $19563521 and Vaughan agreed to pay disgorgement of $232500 prejudgment interest of $527850 and a civil monetary penalty of $5000064

On August 10 2015 the SEC instituted a settled AP against an investment management company for allegedly failing to disclose a conflict The SEC claimed that an advisory client made a $50 million loan to a senior executive which the SEC claimed allowed the executive to personally participate in an acquisition led by the management companyrsquos parent Allegedly the management company subsequently invested certain other clientsrsquo funds in two transactions in which the advisory client had invested on different terms The SEC asserted

that the management company thus breached its fiduciary duty by failing to disclose the potential conflict of interest to both sets of clients The SEC also alleged that the management company violated the Advisers Act by inadvertently billing a client approximately $65 million in asset management fees on non-managed assets by inaccurately coding the non-managed assets Finally the SEC alleged that the management company failed to implement certain compliance policies and procedures enforce its code of ethics and maintain required books and records The SEC found that the management company violated Sections 206(2) 206(4) 204(a) and 204A of the Advisers Act and Rules 206(4)-7 204-2(a)(3) 204-2(a)(5) and 204A-1 thereunder The management company agreed to pay a $20 million penalty without admitting or denying the Commissionrsquos findings65

Also on September 29 2015 the SEC filed a complaint in federal court against Lee D Weiss and his investment advisory firm Family Endowment Partners LP (FEP) for allegedly misappropriating investments and concealing conflicts of interest Weiss and FEP allegedly advised their clients to make investments in companies Weiss owned and controlled without telling the clients of their relationship to the companies The SEC claimed that Weiss and FEP then used the investment funds to pay FEPrsquos financial obligations and delinquent interest owed to other clients The SEC further claimed Weiss and FEP advised clients to invest approximately $5 million in a portfolio of consumer loans with a company that offered to pay an annual return of 18 but Weiss structured the investments so his clients received only 9 while he pocketed the remaining 9 The SEC claimed that Weiss and FEP violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Sections 206(1) 206(2) 206(3) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and Section 204(b)(5) of the Advisers Act and Rule 204-1 thereunder The SEC is seeking disgorgement from Weiss FEB and several companies owned by Weiss66 The action is ongoing

On September 30 2015 the SEC settled claims against Focus Media Holding Ltd (Focus) a China-based advertising company and its founder Jason Jiang The SEC alleged Focus and Jiang failed to adequately disclose the partial sale of securities of Focusrsquos wholly owned subsidiary Allyes Online Media Holdings Ltd (Allyes) to certain Allyes and Focus insiders before the securities

Securities Enforcement 2015 Year-End Review Page 15

were sold to a private equity firm Allegedly the securities were sold to the private equity firm at approximately six times the price the insiders had paid for the securities The SEC alleged that the failure to disclose the sales to insiders violated the reporting and antifraud provisions of the federal securities laws Without admitting or denying the SECrsquos allegations Focus agreed to pay a civil monetary penalty of $346 million and Jiang agreed to pay a civil monetary penalty of $969 million disgorgement of $9690000 and prejudgment interest of $164786567

On October 16 2015 the SEC filed a civil injunctive action in federal court in the District of Colorado against Donald J Lester and his private equity firm alleging violations of the federal securities laws The SEC alleged that starting in January 2010 and continuing for five years Lester and his firm sold unregistered securities in two investment funds they managed CFI Fund LLC (CFI) and NuPower LLC (NuPower) raising approximately $10 million The SEC further alleged that the funds acted as unregistered investment companies and neither Lester nor his firm were registered as brokers or associated with registered brokers while trading in securities Additionally Lester purportedly devised a fraudulent scheme to use $28 million of CFI investment funds to meet his firmrsquos repayment obligation to a group of investment funds called Equity Edge that Lesterrsquos firm guaranteed Specifically the SEC alleged that Lesterrsquos firm transferred NuPower to Equity Edge for no consideration after which CFI purchased a 50 interest in NuPower from Equity Edge for $28 million CFIrsquos investors allegedly were not informed about the conflict of interest in the transaction or about the purchase The SEC is seeking among other relief permanent injunctions civil monetary penalties and disgorgement with prejudgment interest68 The action is pending

On June 29 2015 the SEC filed a settled AP against Welhouse amp Associates Inc (WAI) a state-registered investment adviser and its owner principal and CCO Mark Welhouse for an alleged ldquocherry-pickingrdquo scheme which purportedly violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act According to the SEC from February 2010 until January 2013 Welhouse and his firm allocated options trades in an SampP 500 exchange traded fund in a manner that violated his fiduciary duty Specifically the SEC claims that Welhouse disproportionately allocated profitable trades to his

personal and business accounts and allocated unprofitable trades to his advisory clients Welhouse allegedly made this unfair allocation through purchasing options in an omnibus account and delaying allocation of the purchases until after the value of the trades could be determined Without admitting or denying the SECrsquos findings Welhouse and WAI agreed to jointly and severally pay disgorgement of $418141 prejudgment interest of $5091860 and a $300000 civil monetary penalty In addition WAI was censured and Welhouse was barred from the securities industry69

3 Custody and Compliance Rules of the Advisers Act

On August 6 2015 the SEC instituted a settled AP against Reid S Johnson founder sole owner president and managing director of The Planning Group of Scottsdale LLC (TPGS) an Arizona-based investment adviser for allegedly aiding and abetting violations of Rules 206(4)-2 (the Custody Rule) and 206(4)-7 (the Compliance Rule) under the Advisers Act The Custody Rule imposes detailed requirements governing the manner in which a SEC-registered investment adviser must hold client assets and related obligations The Compliance Rule requires registered investment advisers to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act by the adviser and any of its supervised persons

The SEC alleged that TPGS violated the Custody Rule by failing to accurately determine the securities over which it had custody and by failing to ensure that the securities were maintained by a qualified custodian The SEC also charged that TPGS violated the Compliance Rule by failing to maintain an adequate compliance manual because TPGSrsquos compliance manual did not address the 2009 amendments to the custody rule Finally the SEC charged that TPGS and Johnson willfully made materially false representations in TPGSrsquos Forms ADV from 2010 through 201270 The action is ongoing

On August 6 2015 the SEC instituted a settled AP against a Texas-based investment advisory firm its sole owner and manager John P Bott and its former Chief Compliance Officer F Robert Falkenberg for allegedly violating the principal transaction prohibitions and Custody and Compliance Rules under the Advisers Act The SEC claimed that the investment advisory firm failed to provide any prior written disclosure or obtain consent from clients for at least 2000 securities transactions and

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 2

its use of litigated APs against non-registered respondents in 2015

Third the Commission sought and obtained admissions in eight actions in the second half of 2015 bringing the total for 2015 to 14 admissions which is a slight increase over the 12 admissions obtained in 2014 While varied in scope and nature the admissions obtained in 2015 seemed to suggest an increased focus on demanding admissions where the alleged wrongdoing at issue interferes even unintentionally with the SECrsquos ability to regulate the securities industry

Fourth after spending most of 2015 giving broad waivers from the disqualification provisions of the federal securities laws the Commission closed out the year by granting a so-called conditional waiver in an approach that the Commission described as ldquodifferent and more outcome-focusedrdquo The conditional waiver among other things required a bank to retain a compliance consultant for a five-year period to review and monitor the bankrsquos activities as an investment manager and placement agent for private securities offerings including related policies and procedures and to make the consultantrsquos annual report publicly available This departure from past practice could signal that the Commissionrsquos days of routinely granting broad waivers are over

Fifth the SEC continued to be inundated with tips concerning alleged corporate wrongdoing as part of its Whistleblower Program while at the same time the Second Circuit ruled that the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) protect employees who are fired for disclosing wrongdoing internally instead of to the SEC These two developments could lead to increased whistleblowing and an increased risk for employers when dealing with potential whistleblowers

Sixth the SEC continued to emphasize cybersecurity instituting a series of enforcement actions arising out of the review of cybersecurity systems conducted by its Office of Compliance Inspections and Examinations (OCIE) One of the SECrsquos first enforcement actions following OCIErsquos review was instituted based on perceived weaknesses not in the respondentrsquos systems but in the systems of a third-party vendor used by the respondent

Seventh while the Supreme Court rejected the governmentrsquos request for certiorari from the Second Circuit decision in United States v Newman seemingly settling the standard for establishing a personal benefit in insider trading cases on January 19 2016 the Supreme Court granted certiorari in United States v Salman a Ninth Circuit decision that also considered the circumstances under which it is permissible to infer the existence of a personal benefit The Supreme Courtrsquos ruling in Salman will likely clarify the standard for establishing what type of personal benefit will suffice in insider trading cases

Eighth the SECrsquos aggressive institution of enforcement actions against compliance personnel was one of the issues that most divided the Commission in 2015 with Commissioner Daniel Gallagher expressing concern that such actions would disincentivize vigorous compliance activity while Commissioner Aguilar and Chair White responded that compliance officers who did their jobs competently diligently and in good faith had nothing to fear from the SEC

Ninth courts issued numerous significant rulings concerning the Commission in the second half of 2015 We highlight below rulings by the DC Circuit that held that the SEC could not apply the remedial provisions of Dodd-Frank concerning industry bars retroactively and that Section 4E of the Securities Exchange Act of 1934 (Exchange Act) does not set a jurisdictional limitation period for the SEC to bring an enforcement action after issuing a Wells notice the Second Circuitrsquos highly-anticipated decision concerning materiality in an appeal of a securities fraud conviction that while coming in a criminal case will likely allow the SEC to continue to push the envelope for what constitutes a material misstatement and a decision from the Southern District of New York criticizing the SEC for obtaining an asset freeze in connection with the collapse of a bank in the Cayman Islands

Finally this review highlights some of the more important developments and cases from 2015 relating to insider trading accounting fraud independent auditors the FCPA investment advisers broker dealers crowdfunding the financial crisis and credit rating agencies

Securities Enforcement 2015 Year-End Review Page 3

II Significant Enforcement Division Developments

A Change in Commissioners

Commissioners Luis Aguilar (Democrat) and Daniel Gallagher (Republican) left the SEC in the second half of 2015 On October 20 2015 President Obama nominated Hester Peirce a former aide to Senate Banking Committee Chairman Richard Shelby (R-Ala) and current senior research fellow at the Mercatus Center at George Mason University (a free-market-oriented think tank) and Lisa Fairfax a former member of the Financial Industry Regulatory Authorityrsquos (FINRA) National Adjudicatory Council and current George Washington University Law professor If Peirce and Fairfax are confirmed four of the SECrsquos five commissioners would be women for the first time and Fairfax would be the third African-American commissioner in SEC history7

The simultaneous departure of Gallagher and Aguilar is particularly notable because the two held sharply different views on a number of policy matters including recent enforcement actions against compliance officers (which we discuss in Section IIH below) Although it is unclear how Peirce and Fairfax will approach this and other issues the partisan interests that supported each nomination strongly suggests that they will have divergent policy views as well largely mirroring Gallagherrsquos and Aguilarrsquos enforcement philosophies

Peirce was nominated at the recommendation of the Senate Banking Committee headed by Senator Shelby She has been critical of the financial regulatory agenda promoted by Senator Elizabeth Warren (D-Mass) and other Democrats Indeed Peirce wrote Dodd-Frank What It Does and Why Itrsquos Flawed a book critiquing the landmark legislation signed in 2010 Fairfax on the other hand was championed by Senator Warren In 2011 Fairfax published a book of her own Shareholder Democracy A Primer on Shareholder Activism and Participation8

It is unclear when the Senate will hold confirmation votes on Peirce and Fairfax The Senate Banking Committee must first hold hearings on both nominees Although the confirmations of Peirce and Fairfax would result in the most diverse group of SEC commissioners in US history it seems unlikely that either nominee would change the current tenor and ideological divide within the Commission

B The SECrsquos Use of Administrative Proceedings

As we reported in our Mid-Year Review federal court challenges to the SECrsquos use of its in-house administrative court as a forum for litigating contested enforcement actions began to gain traction in 2015 These federal court successes together with the continued criticism from commentators appear to have directly led to changes to the AP process

First on September 24 2015 the SEC proposed amendments to ldquomodernizerdquo its AP process including by adjusting the deadlines to allow more time for discovery preparation for the hearing and issuance of an initial decision following the hearing and by granting the parties discretion to take limited depositions during the pre-hearing discovery period 9 While these procedural changes would alleviate some of the discovery disadvantages of APs they fall well short of providing respondents in APs with a reasonable opportunity to mount a defense particularly when viewed against those provided by the Federal Rules of Civil Procedure Nor does the SECrsquos proposal address recent district court decisions that have held that the Constitution requires that if an ALJ is going to preside over a litigated AP the ALJ must be appointed by the President of the United States the federal courts or the heads of federal departments Thus while the amendments may ldquomodernizerdquo APs the changes are by no means revolutionary

Second the SEC has begun to bring fewer cases as litigated APs For example between July and September 2015 the SEC brought only 11 of its contested cases as APs down from 40 during the same period in 201410 And it has seemingly stopped bringing litigated APs against non-regulated persons one of the most controversial aspects of its increase in APs from 2014

While proposed amendments to the AP rules and the Commissionrsquos reduced use of APs are significant developments they are not likely to stem the controversy over the SECrsquos use of APs Indeed the SEC recently received a stinging rebuke from the First Circuit in Flannery v SEC which reversed a controversial decision by the Commission that had reversed an ALJrsquos finding that the respondents in the AP had not violated the federal securities laws

Securities Enforcement 2015 Year-End Review Page 4

In Flannery v SEC the SEC alleged that two former employees of a custodian bank specializing in services to mutual funds made willful and material misrepresentations in an investor presentation and in letters to investors about an unregistered bond fund managed by the bank The fund was made up of asset-backed securities that substantially underperformed during the subprime mortgage crisis After a nearly three-week hearing the presiding ALJ found that (i) the respondents did not have ultimate authority over the documents containing the alleged misstatements and (ii) the documents themselves did not contain materially false or misleading statements or omissions The Enforcement Division appealed the ALJrsquos ruling to the Commission Chair White and the two Democratic commissioners then reversed the ALJ (over dissents from the two Republican Commissioners) finding that the respondents had committed fraud

Notwithstanding the generally deferential standard that applies to appeals from a Commission opinion the First Circuit rejected the Commissionrsquos findings concluding that the findings were not supported by substantial evidence The court noted that it would use a less deferential standard of review because the Commission had reached the opposite conclusion from its own ALJ rejected several of the Commissionrsquos factual findings and even found that the Commission had misread one of the communications at issue The court also emphasized that the SEC had not introduced any testimony from fund investors to support the position that certain statements at issue were misleading or material11 In short eight years after the conduct at issue and five years after the Commission issued an order instituting proceedings to begin an AP the First Circuit concluded that there was no evidence of fraud implicitly raising a question about the SECrsquos repeated claim that APs are appropriate because of its specialized expertise in evaluating alleged federal securities law violations

At the same time constitutional challenges concerning how ALJs are appointed continue to wind their way through the courts and could ultimately have a significant impact on the SECrsquos use of APs While the due process challenges based for example on claims that APs violate respondentsrsquo rights to jury trials have generally been unsuccessful respondents have achieved a measure of success in challenging the appointment of ALJs as unconstitutional pursuant to the Appointments Clause of Article II of the Constitution Under the Appointments Clause ldquoinferior officersrdquo or government officials

exercising significant authority pursuant to the laws of the United Statesrdquo12 must be appointed by the President the federal courts or the heads of the federal departments13 Respondents argue that ALJs are inferior officers and because they have not been appointed by the President SEC Commissioners or a federal court their appointment violates the Constitution

For example in Hill v SEC and Gray Financial Group Inc v SEC Judge Leigh Martin May of the Northern District of Georgia preliminarily enjoined the two APs finding that the SECrsquos hiring of ALJs (who exercise significant authority under the laws of the United States and their roles are specified by statute) violated the Appointments Clause because ALJs meet the Article II criteria that require appointment by the President the federal courts or the heads of federal departments14 The SEC appealed to the Eleventh Circuit which consolidated the Hill and Gray appeals and tentatively assigned them to the courtrsquos argument calendar for the week of February 22 2016

Other courts however have dismissed similar challenges as premature noting that judicial review is available at the conclusion of the administrative process For example in Bebo v SEC Judge Rudolph Randa of the Eastern District of Wisconsin dismissed a respondentrsquos action seeking to stop an AP for lack of subject matter jurisdiction finding that ldquo[i]f the process is constitutionally defective [respondent] can obtain relief before the Commission if not the court of appealsrdquo15 The Seventh Circuit affirmed on August 24 2015 and denied rehearing en banc on November 5 2015 Similarly in Jarkesy v SEC the DC Circuit ruled that district courts lack subject matter jurisdiction to entertain respondentsrsquo constitutional challenges prior to the conclusion of the AP 16 Judge Randarsquos analysis has been adopted by judges in the Southern District of New York (SDNY) including in Tilton v SEC17 Tilton is presently on appeal before the Second Circuit which signaled that it may take a different view from the Seventh and DC Circuits by staying the AP in Tilton the day after it heard oral argument in the appeal18

Securities Enforcement 2015 Year-End Review Page 5

C Admissions of Liability in Settled Cases

The SEC obtained admissions in 14 enforcement actions in 2015 mdash eight in the second half of the year The SEC still has yet to clarify its policy statements from June 18 2013 when it announced that it would demand admissions in settling enforcement actions where (1) the misconduct harmed large numbers of investors or placed investors or the market at risk of potentially serious harm (2) the alleged misconduct was egregious and intentional or (3) the defendant engaged in an unlawful obstruction of the Commissionrsquos investigative processes19 Settlements that included admissions in the second half of 2015 suggest that the SEC may be particularly focused on securing admissions where the alleged wrongdoing at issue interferes even unintentionally with the SECrsquos ability to investigate securities violations or where the alleged wrongdoing involves information that has the potential to affect a large number of investment decisions

For example on July 14 2015 the SEC filed a settled AP against an investment adviser for providing inaccurate trade data to its brokers which allegedly caused errors in the brokersrsquo books and records and in the ldquoblue sheetrdquo data the brokers submitted to the SEC The SEC claimed that the investment adviser adjusted the way its sales data system identified certain trades which caused some long sales to be erroneously shown as short sales According to the SECrsquos order the investment adviser inadvertently failed to appreciate that this adjustment would affect the data it sent to its brokers and in turn the brokersrsquo blue sheets The investment adviser admitted to the conduct and agreed to pay nearly $4493427 consisting of a civil monetary penalty of $425 million disgorgement of $214380 and prejudgment interest of $2904720

The settlement with the investment adviser was the second time in as many years that the SEC required an admission to settle an enforcement action involving unintentionally inaccurate blue sheet data The SEC had previously obtained an admission of wrongdoing on January 29 2014 from a broker-dealer for omitting trades from blue sheet data as a result of a computer error 21 Enforcement Division Director Ceresney emphasized in both settlement releases that the SEC relies on accurate blue sheet data in its regulation of the securities markets

Similarly on September 9 2015 as discussed more fully in Section IVC below the SEC filed a settled AP against BDO USA LLP (BDO) and five of its partners for allegedly ignoring red flags and issuing false and

misleading unqualified audit opinions 22 The firm admitted wrongdoing mdash the first time a public accounting firm has admitted to such conduct according to the SEC mdash and agreed to pay over $21 million to settle the claims Without admitting or denying the SECrsquos allegations the four audit partners who settled with the SEC paid a total of $65000 in monetary fines and agreed to be suspended from practicing before the SEC for varying periods of time In requiring that BDO admit wrongdoing the SEC seemed to focus on the central role audit reports play in investment decisions and thus how misleading audit reports could undermine the integrity of the securities market The SEC did not indicate why it took a different view as to the individuals

D Grants of ldquoBad-Actorrdquo Waivers

As discussed in our Mid-Year Review journalists politicians and even the SECrsquos own commissioners criticized the Commissionrsquos practice of consistently granting waivers from the disqualification provisions of the federal securities laws after multiple large financial institutions received waivers in the first half of 2015 following settlements with the Commission 23 These ldquobad-actorrdquo waivers allow defendants who are subject to certain administrative orders or injunctions or who have been convicted of specified crimes to continue to benefit from exceptions and safe harbors under the federal securities laws for which they would otherwise be disqualified such as Well-Known Seasoned Issuer (WKSI) status use of the safe harbor for forward-looking statements or use of certain exemptions under the federal securities law Supporters of waivers have generally argued that disqualification provisions are intended to protect markets from ongoing harm not punish defendants 24 while critics have complained that the waivers make certain firms ldquotoo big to barrdquo25

The SEC appeared to be continuing its prior policy of generally granting waiver requests in August when it granted a large financial institution a waiver after two of the bankrsquos affiliates settled claims that they allegedly understated the risks and suitability of investments for traditional bond investors (as discussed below in Section IVD) 26 On August 27 2015 however (now former) Commissioner Aguilar recommended that the SEC increase its use of conditional waivers which would impose certain limitations but would not fully disqualify a defendant to help dispel the notion that the breadth and severity of disqualification provisions have caused the

Securities Enforcement 2015 Year-End Review Page 6

Commission to routinely grant blanket waivers especially to large financial institutions

On December 18 2015 the SEC granted such a conditional waiver when it and the Commodity Futures Trading Commission (CFTC) settled with a large financial institution that had allegedly failed to tell clients that it was steering them to the bankrsquos own products which would allow the bank to earn higher fees As part of the settlement the bank agreed to pay a total of $307 million and made certain admissions In addition the Commission granted the institution a conditional waiver that would allow it to continue to act as an investment manager and placement agent for private funds that issue unregistered securities under Rule 506 of Regulation D of the Securities Act of 1933 (Securities Act) and would allow its affiliates to continue to conduct business under Rule 506 but subject to a number of conditions

First the SEC or CFTC can revoke the conditional waiver if the bank fails to comply with either agencyrsquos order or is the subject of any action triggering the disqualification provisions under the federal securities laws for a period of five years

Second the conditional waiver requires the bank to engage a compliance consultant for a five-year period to conduct a comprehensive review of the bankrsquos practices policies and procedures relating to its management and placement of unregistered securities under Rule 506 The compliance consultant must issue an annual report each year summarizing its findings which will be published on the Commissionrsquos website

Third the conditional waiver requires senior executives to assist in addressing identified compliance issues and certify that they have read the compliance consultantrsquos report27

The SECrsquos insistence on such terms suggests that the days of the Commission routinely granting broad unconditional waivers may be coming to an end The commentary by certain Commissioners about conditional waivers also indicates that the SEC will likely make greater use of conditional waivers in the coming months

Securities Enforcement 2015 Year-End Review Page 7

E Update on the SECrsquos Whistleblower Program

Notable whistleblower awards by the Commission in the second half of 2015 included an award on July 17 2015 of $3 million mdash the third-highest award ever under the Whistleblower Program mdash and an award of over $325000 on November 4 2015 28 In announcing the $325000 award the Commission included an admonition for future whistleblowers stating that ldquo[t]he whistleblower waited until after leaving [his employer] to come forward and agency officials say the award could have been higher had this whistleblower not hesitatedrdquo

The Commission announced a joint award of 20 of monetary sanctions to a pair of foreign whistleblowers on September 28 201529 and an award of 28 of sanctions to a separate whistleblower on September 29 201530 The announcements of these awards did not include specific amounts because monetary sanctions have yet to be collected

The SECrsquos Whistleblower Program also received a boost in 2015 from a decision by the Second Circuit regarding eligibility for anti-retaliation protection under Dodd-Frank The decision Berman v NeoOgilvy LLC deferred to the SECrsquos interpretation of ldquowhistleblowerrdquo in Dodd-Frank and held that a whistleblower could sue for retaliation under Dodd-Frank even if the whistleblower was retaliated against for disclosing information to an employer not the Commission31 The Second Circuit decision conflicts with the Fifth Circuitrsquos holding in Asadi v GE Energy that Dodd-Frankrsquos plain language only allowed an employee to sue for retaliation provisions if the employee was retaliated against for disclosing information to the SEC32

Berman could further the SECrsquos policy of encouraging internal reporting which is reflected in among other things Rule 21F-6(a)(4) of the Exchange Act which considers a whistleblowerrsquos participation in an entityrsquos internal reporting system a plus factor in determining the size of an award and Exchange Act Rule 21F-4(b)(7) which creates a 120-day ldquolook-back periodrdquo for whistleblowers who first report wrongdoing through an entityrsquos internal processes33 The look-back period allows a whistleblower to receive credit for reporting information as of the date of the internal report

Whistleblowers claiming to have been fired after reporting wrongdoing internally began bringing suits alleging violations of Dodd-Frankrsquos anti-retaliation provisions within a week of Berman For example on September 17 2015 a former branch manager at an international financial institution filed a whistleblower suit in the SDNY alleging that he had been fired after reporting a number of mortgage loans originated by unregistered loan officers in violation of federal mortgage laws34

Separately as the year came to a close reports emerged of a pending whistleblower award that could be the largest in the programrsquos history As described in Section IID above a large financial institution agreed to a $307 million settlement in December with the SEC and CFTC The actions against the bank reportedly stemmed from a whistleblower tip and based on the settlement amount the whistleblower could receive an award of over $90 million35 Even an award on the low end of the range however could easily surpass $30 million the highest award to date Such staggering awards can only boost the Whistleblower Programrsquos profile which could further increase reporting to the SEC

F Focus on Cybersecurity

In the spring of 2014 OCIE released a risk alert announcing that the SEC would examine registered broker-dealers and investment advisers to assess their cybersecurity preparedness 36 OCIE stated that its examinations would focus on cybersecurity governance identification and assessment of cybersecurity risks protection of networks and information risks associated with remote customer access and funds transfer requests risks associated with vendors and other third parties detection of unauthorized activity and experiences with certain cybersecurity threats OCIE completed its examinations on February 3 2015 and issued a report that criticized companies for failing to prevent cyberattacks notwithstanding written policies designed to prevent such attacks 37 The SECrsquos Division of Investment Management then released guidance for the protection of customer information that emphasized that broker-dealers and investment advisers should limit employee access to data employ encryption technologies and develop incident response plans38

Securities Enforcement 2015 Year-End Review Page 8

While the guidance was welcome it was arguably too general to be particularly useful much like the provisions of Rule 30(a) of Regulation S-P under the Securities Act (the Safeguards Rule) The Safeguards Rule generally requires that regulated entities adopt written policies and procedures that are reasonably designed to safeguard customer records and information However the rule does not define specific requirements for a reasonable cybersecurity program so it is possible that the mere event of a data breach is enough to show that a company lacks reasonably designed procedures Further even a large and sophisticated institution with an advanced cybersecurity policy still faces the risk of a cyberattack mdash and a potential violation of the Safeguards Rule mdash through the smaller less-sophisticated companies with which larger companies interact For example the hackers who stole customer data for 70 million of big-box retailer Targetrsquos customers in 2013 reportedly accessed Targetrsquos systems via the network of the small business responsible for Targetrsquos heating and air conditioning39

The SEC brought one of the first enforcement actions related to OCIErsquos cybersecurity review in the second half of 2015 and that action involved a third-party service provider Specifically on September 22 2015 the SEC instituted a settled AP against RT Jones Capital Equities Management Inc (RT Jones) for allegedly failing to adopt written policies and procedures reasonably designed to protect customer records and information in violation of the Safeguards Rule40 The SEC alleged that RT Jones stored sensitive personally identifiable information for over 100000 clients and other persons on a server hosted by a third-party vendor without adopting written policies and procedures for the security confidentiality or protection of that information The SEC also alleged that a July 22 2013 cyberattack left RT Jonesrsquos customersrsquo data vulnerable to theft Without admitting or denying the SECrsquos allegations RT Jones agreed to pay a $75000 civil monetary penalty Prior to the settlement RT Jones also engaged in remedial efforts by appointing an information security manager to oversee data security and protection and implementing a written information security policy

OCIE has announced that it will conduct a second round of cybersecurity reviews 41 which could lead to more enforcement actions With this additional review and the enforcement actions that are also likely to come calls may grow louder for the SEC to provide more detailed guidance on cybersecurity requirements

G Insider Trading in the Wake of United States v Newman

The Supreme Courtrsquos denial of certiorari in United States v Newman appeared to settle the debate over whether to succeed in an insider trading enforcement action where the SECrsquos only evidence of a personal benefit to the insider is the existence of a personal relationship with the tippee the SEC needed to offer ldquoproof of a meaningfully close personal relationship that generates an exchange that is objective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo42 The debate will continue for at least a few more months however as the Supreme Court recently granted certiorari in United States v Salman a case out of the Ninth Circuit that is likely to address the personal benefit standard set by the Second Circuit in Newman

The SEC may well seek to delay disposition of certain pending insider trading cases until the Supreme Court decides Salman as the SEC has felt the impact of Newman in recent cases On September 14 2015 the SEC suffered a rare defeat in an AP when an ALJ dismissed insider trading claims against Joseph Ruggieri a former trader at Wells Fargo Securities LLC ALJ Jason Patil found that although the SEC showed that Ruggieri traded on material non-public information on numerous occasions the allegations did not meet the SECrsquos burden under Newman to show that the corporate insider gave Ruggieri the information in exchange for a personal benefit ALJ Patil was not persuaded by the SECrsquos argument that Ruggieri received the information in exchange for positive feedback and instead found that it was more likely that Ruggierirsquos feedback was genuine and part of a standard practice as Ruggieri had given the corporate insider positive feedback even before being provided with material non-public information43

Newman may have also had a significant impact on the SECrsquos AP against Steven Cohen the former head of hedge fund SAC Capital Advisors LP (SAC Capital) which settled on January 8 2016 The SEC had alleged that during Cohenrsquos time at the helm of SAC Capital he failed to reasonably supervise high-performing traders Michael Steinberg and Mathew Martoma who had been criminally convicted of insider trading after jury trials The SECrsquos settlement order found that Cohen failed to supervise Martoma (Steinbergrsquos conviction was vacated after Newman for insufficient evidence of a personal benefit) ignored red flags that Martoma was engaged in insider

Securities Enforcement 2015 Year-End Review Page 9

trading and encouraged Martoma to talk to a doctor about nonpublic drug trial results to inform trading decisions

To settle the SECrsquos claims Cohen without admitting or denying wrongdoing agreed to retain an independent consultant to conduct periodic reviews of his family office firms to subject his firms to periodic SEC examinations and to be barred from supervising funds that manage outside money for two years The settlement allows the SEC to extend the time period during which Cohen must comply with these requirements in the event the Commission brings a new action against Cohen and requires any registered broker-dealer or investment advisor that retains Cohen in a supervisory capacity before 2020 to retain an independent consultant until the end of 201944

The SECrsquos AP against Cohen was perhaps the most anticipated AP in recent years and its sudden and surprising settlement which did not include a monetary penalty suggests that the Commission may have had serious concerns about its case in the wake of Newman

The continuing impact of Newman is now an open question in light of the Supreme Courtrsquos grant of certiorari in Salman The question as to which the Supreme Court granted certiorari in Salman is whether the personal benefit to the insider that is necessary to establish insider trading requires proof of an exchange that is ldquoobjective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo as the Second Circuit held in Newman45 The Ninth Circuitrsquos opinion in Salman written by SDNY Judge Jed Rakoff (sitting by designation) can be easily distinguished from Newman on its facts as it did not involve a remote tippee who lacked knowledge of any personal relationship between the insider and immediate tippee and because the personal relationship between tipper and tippee appeared to be far more meaningful than in Newman 46 Nevertheless the Supreme Courtrsquos decision may reach more broadly than the facts of either case to bring some clarity to insider trading law which could be a welcome development by all A decision in Salman is expected by the end of the Supreme Courtrsquos current term in June 2016

H Focus on Compliance Officers

The SECrsquos pursuit of enforcement actions against compliance professionals was one of the most divisive issues of 2015 As we reported in our Mid-Year Review after having typically limited enforcement actions against individuals with compliance authority to those who also had other management responsibilities or in cases of actual fraud the SEC brought claims in the first half of 2015 against individuals responsible solely for compliance and in the context of their compliance roles This sparked public statements of dissent and criticism from Commissioner Gallagher Commissioner Aguilar responded with a statement addressing the criticism and reassuring compliance professionals that the SEC was not interested in bringing enforcement actions against compliance professionals who were obeying the law and fulfilling their responsibilities Chair White added her voice to the debate on July 14 2015 assuring compliance professionals that ldquo[w]e do not bring cases based on second guessing compliance officersrsquo good faith judgments but rather when their actions or inactions cross a clear line that deserve sanctionrdquo47 And on November 4 2015 Enforcement Director Ceresney attempting to assuage the fears of compliance officers who worry they will be targeted reiterated that the overwhelming majority of the cases the SEC brings involve compliance officers who crossed a clear line by engaging in affirmative misconduct or obstructing regulators48

On August 5 2015 in an action illustrative of the types of acts that appear to result in enforcement actions against compliance officers ALJ Cameron Elliot found that Judy Wolf a former investment bank compliance officer aided and abetted her employerrsquos violation of the books and records provisions of the Exchange Act by altering documents during an SEC investigation After learning that the SEC was investigating Wolf admitted to altering her notes regarding a review of securities trades in a fast food chain restaurantrsquos stock that she did not flag for her superiors by including reports of takeover rumors that would have bolstered a conclusion that the trades were improper Although ALJ Elliot found that Wolf violated the Exchange Act he declined to sanction her because among other things he concluded that her violations were isolated and not egregious ALJ Elliot noted that some factors favored sanctions but held that Wolf was a low-level employee and sanctions would allow her employer to label her a ldquobad applerdquo and move on without examining its practices ALJ Elliot further alluded to the

Securities Enforcement 2015 Year-End Review Page 10

ongoing debate over the Commissionrsquos policy of bringing actions against compliance personnel by noting that sanctioning low-hanging fruit like Wolf could discourage competent persons from taking compliance positions49

On August 6 2015 the SEC agreed to settle claims it had brought against an investment advisory firm its CEO John P Bott II and its chief compliance officer Robert Falkenberg50 In March 2011 the SEC asked Falkenberg to provide copies of his 2010 review of the firmrsquos policies and procedures which Falkenberg allegedly told the Commission that he had conducted in February 2011 A review of the firmrsquos metadata however allegedly revealed that Falkenberg had not actually conducted his review until April 2011 and had only spent a few hours drafting his report which he never sent to the firmrsquos CEO The SEC claimed the firm had violated Sections 206(3) 206(4) and 206(4)(A) of the Investment Advisers Act of 1940 (the Advisers Act) and Rules 206(4)-2 206(4)-7 and 206(4)A-1 thereunder and that Bott and Falkenberg had aided and abetted the firmrsquos violations Pursuant to the settlement Bott agreed to pay $450000 in disgorgement to the firmrsquos clients plus prejudgment interest and Bott Falkenberg and the firm were ordered to pay civil monetary penalties in the amounts of $70000 $40000 and $200000 respectively for a total of more than $760000 Falkenberg was also required to complete 30 hours of compliance training for his alleged failure to monitor the firm by conducting an annual review of its policies and procedures

In addition to its recent actions involving compliance officers the SEC has been scrutinizing investment advisersrsquo growing use of outside CCOs For example on November 9 2015 OCIE released a report finding that several outsourced CCOs had not effectively implemented compliance programs for which they were responsible51 In its risk alert OCIE reported that ldquocertain outsourced CCOs could not articulate the business or compliance risksrdquo their firms faced or whether the firms had adopted written policies and procedures to mitigate those risks52 In other instances outside CCOs were not tailoring program templates to the adviserrsquos business meaning that the compliance materials were not applicable to the firm The SEC concluded that advisers with outsourced CCOs should review their business practices to ensure that CCOs have enough authority to implement compliance programs and policies

Even if the SEC follows through with its assurances that only compliance officers who cross a ldquoclear linerdquo will face

enforcement action the number of regulatory lines now drawn for compliance officers mdash and their new focus on outsourced compliance programs mdash makes it clear that this remains an area of heightened enforcement risk

III Selected Judicial Developments Several judicial opinions of significance to the SECrsquos enforcement program were issued in the second half of 2015 and we summarize four of the most significant opinions below First the DC Circuit held that the SEC could not retroactively apply the remedial provisions of Dodd-Frank concerning industry bars to punish conduct that occurred before Dodd-Frank was enacted Second the DC Circuit in a separate case held that Section 4E of the Exchange Act does not set a limitation period for the SEC to bring an enforcement action after issuing a Wells notice Third the Second Circuit issued a long-awaited decision in an appeal of a securities fraud conviction in Litvak that while coming in a criminal case will likely allow the SEC to continue to push the envelope for what constitutes a material misstatement Finally Judge Pauley of the SDNY criticized the SEC for its use of an asset freeze in connection with the collapse of a Cayman Islands bank

A Koch v SEC

On July 14 2015 the DC Circuit ruled in Koch v SEC that the SEC could not use remedial provisions of Dodd-Frank to punish an investment adviser for conduct that occurred before Dodd-Frank was enacted53 The SEC had instituted an AP against Donald Koch and his firm Koch Asset Management (KAM) alleging that Koch engaged in a scheme to manipulate the prices of stocks in which KAM had invested Koch purportedly instructed his broker on two different occasions in 2009 to increase the frequency of the brokerrsquos bids on stocks at the end of the trading day which had the effect of inflating the stocksrsquo prices The SEC alleged that Koch and KAM violated Section 10(b) of the Exchange Act and Section 206(1) of the Investment Company Act and requested among other things that Koch be barred from the securities industry

Prior to Dodd-Frank the SEC had the authority to bar individuals from associating with a subset of securities industry participants including broker-dealers and investment advisers Dodd-Frank however expanded the SECrsquos authority to bar individuals from associating with municipal advisors and ratings organizations a power it did not have prior to the passage of Dodd-Frank

Securities Enforcement 2015 Year-End Review Page 11

Although Kochrsquos alleged market manipulation occurred in 2009 a year before Dodd-Frank the SEC sought to bar Koch from the securities industry pursuant to its authority under Dodd-Frank

The presiding ALJ found that Koch engaged in market manipulation but only imposed a limited industry bar that barred Koch from associating with investment advisers Koch appealed to the Commission which not only affirmed the ALJrsquos findings but also expanded the industry bar imposed on Koch to include municipal advisers and ratings organizations Koch appealed the Commissionrsquos ruling to the DC Circuit which also affirmed that Koch had engaged in market manipulation but reversed the Commissionrsquos expansion of Kochrsquos industry bar The panel held that the SEC could not use Dodd-Frank to penalize Koch for conduct that occurred before the statute was enacted because Dodd-Frank did not expressly allow the SEC to apply its provisions retroactively and expanding Kochrsquos industry bar would ldquowould impair rights [Koch] possessed when he acted increase [Kochrsquos] liability for past conduct or impose new duties with respect to transactions already completedrdquo

A week after the DC Circuit ruled Commissioners Gallagher and Piwowar who had dissented from the SECrsquos order expanding Kochrsquos industry bar said in a joint statement that they were ldquopleasedrdquo with the courtrsquos holding and urged the SEC to address ldquoall impermissibly retroactive collateral bars that have been misapplied since the enactment of Dodd-Frankrdquo54

B Montford v SEC

On July 21 2015 the DC Circuit issued its opinion in Montford v SEC holding that the requirement under Section 4E of the Exchange Act that enforcement proceedings be brought within 180 days of a Wells notice (enacted with Dodd Frank) is not an enforceable jurisdictional requirement 55 Montford arose from an appeal of a final order from the Commission finding that respondents violated Sections 204 206 and 207 of the Advisors Act for among other things allegedly failing to disclose the receipt of fees from an investment manager while disclosing to customers that it was ldquoindependentrdquo and ldquoconflict freerdquo The Commission barred respondents from the securities industry required the disgorgement of $210000 and imposed civil penalties56

Respondents appealed the Commissionrsquos order to the DC Circuit raising two challenges each of which the court rejected First respondents argued that the institution of administrative proceedings more than 180 days after issuing a Wells notice violated Section 4E of the Exchange Act and required dismissal Section 4E of the Exchange Act provides that ldquo[n]ot later than 180 days after the date on which Commission staff provide a written Wells notification to any person the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent not to file an actionrdquo The deadline of Section 4E may be extended by the Director of the Division of Enforcement ldquofor certain complex actionsrdquo which the Commission submitted happened in the instant case 57 Without reaching the issue of whether the Commission properly extended the Section 4E deadline the court found that Section 4E of the Exchange Act was ambiguous as to whether its violation served to bar an action by the Commission Accordingly the court concluded that under Chevron the Commissionrsquos interpretation that Section 4E is not a jurisdictional bar was entitled to deference as long as it was reasonable which the court found it was

Second respondents argued that the Commission abused its discretion in imposing civil penalties and ordering disgorgement because in respondentsrsquo view the receipt of money was not illegal and there was no causal link between the Commissionrsquos order of penalties and disgorgement and the alleged nondisclosure The court rejected this argument too noting that the Commission has flexibility in imposing such penalties which will be upheld as long as they are reasonable

Because the Enforcement Division is generally diligent about ensuring that enforcement actions are filed within 180 days of a Wells notice (or seeking an extension from the Division Director) Montford may have limited practical impact More surprising is arguably the judicial finding of ambiguity in a statute that left little room for interpretation

C SEC v Caledonian Bank

On November 10 2015 in SEC v Caledonian Bank Judge William H Pauley III of the Southern District of New York denied the defendantsrsquo motion to dismiss an SEC complaint that defendants had engaged in unregistered sales of securities in violation of Sections 5(a) and 5(c) of the Securities Act as part of an alleged

Securities Enforcement 2015 Year-End Review Page 12

penny stock ldquopump-and-dumprdquo scheme that the SEC claimed netted them profits of $75 million According to the SEC the defendants allegedly aggressively marketed the stocks of four companies that contained few assets using a series of sham transactions to conceal beneficial ownership of the securities before offering them to the public The opinion on a motion to dismiss would likely be of limited interest if only considered for its holding

In declining to dismiss the pending case however Judge William H Pauley III aggressively criticized the SECrsquos failure to coordinate its enforcement efforts which he stated led to unintended consequences and collateral victims According to the courtrsquos opinion at the same time a team of Washington DC-based SEC attorneys had persuaded Judge Pauley in February 2015 to freeze the assets of a Cayman Islands bank that allegedly sold the fraudulent securities another team of New York-based SEC attorneys who were investigating the some of the same defendants had information showing that the bank had not sold the securities for its own account but merely acted as a broker According to the Judge Pauley the freeze order (which was predicated in part on the belief that the bank had not acted as a broker) had the effect of bankrupting the bank shortly thereafter Judge Pauley blamed the SECrsquos ldquobureaucratic siloingrdquo for causing what he described as an unfortunate and unnecessary outcome In a broader criticism of the SEC Judge Pauley stated ldquoit is hard to believe that those charged with overseeing enforcement are not monitoring activities to avoid needless duplication of effortrdquo and that ldquo[g]iven the high stakes in securities enforcement actions and in the face of a workload the SEC describes as an lsquooverwhelming burdenrsquo a self-examination may be appropriaterdquo It remains to be seen what impact the criticism will have

D United States v Litvak

On December 8 2015 in a highly anticipated ruling the United States Court of Appeals for the Second Circuit reversed bond trader Jesse Litvakrsquos conviction on false statement charges and vacated his conviction on securities fraud charges58 The panel held that the trial court abused its discretion when it excluded critical expert testimony regarding pricing in the bond market which could have bolstered Litvakrsquos arguments that his allegedly false statements were not material The panel only vacated Litvakrsquos securities fraud conviction however rejecting his central argument that the statements at issue were immaterial as a matter of law The SEC had brought a parallel civil action against Litvak arising out of the same

allegations which remains on hold pending the outcome of Litvakrsquos criminal case59

The panelrsquos decision was not a complete win for Litvak and could have broad implications for future SEC actions Litvakrsquos central defense at trial and on appeal was that his alleged misrepresentations which related to the profit he stood to make from counterparties on bond transactions were immaterial as a matter of law Specifically he argued that the statements were immaterial as a matter of law because they related to how much Litvak paid for the securities himself and had no impact on the value of the securities themselves Put another way Litvak argued that counterparties could not have considered his false statements important because they did not pertain to any objective valuation of the underlying securities

The panel rejected Litvakrsquos arguments pointing to testimony from Litvakrsquos counterparties who stated that Litvakrsquos alleged misstatements were ldquoimportantrdquo to them and that the counterparties were injured by those misrepresentations by ultimately paying more than they would otherwise have bid for the securities Even though Litvak had credibly argued that the kind of statements at issue were a common business practice that should have had no relevance to pricing the panel concluded the testimony precluded a finding that no reasonable mind could find Litvakrsquos statements material And although the decision was not written as though it broke new ground the panelrsquos approach to materiality and deference to what investors considered to be important may have a lasting impact on the way the SEC pursues investigations by putting a greater focus on gathering evidence concerning investorsrsquo expectations At the same time the courtrsquos decision that excluding Litvakrsquos proffered materiality expert was an abuse of discretion will ensure that future defendants have more leeway to argue their positions in court

In sum while the district court cannot dismiss the remaining charges against Litvak on materiality grounds Litvak will have much more ammunition to fight these charges at trial And for future defendants (in both criminal and SEC actions) this opinion is a stark reminder that questions of materiality are highly fact-specific and that no misrepresentation should be presumed to be harmless or immune from prosecution

Securities Enforcement 2015 Year-End Review Page 13

IV Selected Significant Investigations and Cases

Below we highlight some of the more notable SEC enforcement actions from the latter half of 2015

A Investment Advisers

The SEC continued its especially vigorous oversight of investment advisers in 2015 It brought enforcement actions focused on representations of investment risk and performance disclosure of conflicts of interest the Custody and Compliance Rules of the Advisers Act and disclosure of fees and expenses while signaling a particularly increased focus on private equity

1 Misrepresentation of Investment Risk and Performance

On July 31 2015 the SEC filed a settled AP against a financial advisory firm and its founder Walter F Grenda Jr The SEC alleged that Grenda made false and misleading statements to the firmrsquos advisory clients in recommending and selling investments in a hedge fund called Prestige Wealth Management Fund LP (Prestige Fund) Grendarsquos statements allegedly misled clients into believing that the investments were less risky than they actually were Grenda also allegedly borrowed $175000 from two of his clients which the SEC claimed he misrepresented would be for business purposes but which he spent on personal expenses and debts In its settlement order the SEC found that the advisory firm and Grenda violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder The SEC also found that the advisory firm and Grenda violated Sections 206(1) and 206(2) of the Advisers Act and that Grenda willfully aided and abetted Prestige Fundrsquos violations of Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder The advisory firm was censured by the Commission and had its registration as an investment adviser revoked but did not pay any financial penalties Without admitting or denying wrongdoing Grenda agreed to pay $7741091 consisting of a $50000 civil monetary penalty and $2241091 in disgorgement and prejudgment interest60

On August 4 2015 the SEC instituted a settled AP against Gold Mountain LLC an investment adviser in Iowa and its founder Gregory Bied for allegedly defrauding investors through false statements in quarterly reports

Allegedly Gold Mountain and Bied made false statements from 2012 through mid-2014 to investors in a hedge fund managed by Gold Mountain namely that the fund was achieving positive quarterly returns when in fact the hedge fund had lost around 75 of its value over that time The SEC claimed that Gold Mountain and Bied violated Sections 9(b) and 206(4) of the Advisers Act Without admitting or denying the SECrsquos findings Gold Mountain and Bied consented to an industry bar and to pay a civil monetary penalty of $200000 which will be distributed to investors61

On November 30 2015 the SEC instituted settled APs against investment adviser Alpha Fiduciary Inc (AFI) Arthur Doglione AFIrsquos majority owner and president and Michael Shea AFIrsquos vice president and business development director The SEC alleged that AFIrsquos executive summaries firm profiles presentations and advertising materials contained certain hypothetical performance information but did not disclose that this data was completely hypothetical Moreover the SEC claimed that while some of AFIrsquos materials contained disclosure language the disclosure language did not appear on the same page as the hypothetical performance data rendering it misleading The SEC also found that although AFIrsquos compliance and procedures manual required the chief compliance officerrsquos prior review and approval of any marketing materials Doglione had exercised sole authority over AFIrsquos policies and procedures Thus the SEC alleged that he was solely responsible for the review and approval of AFIrsquos marketing materials prior to their distribution to clients or prospective clients The SEC also claimed that Shea knew that some of the data was hypothetical yet still included this information in materials he sent to clients Moreover Shea allegedly provided prospective clients with a report of an existing clientrsquos portfolio which represented a 144 return without taking any steps to determine if it was representative of the performance of other AFI clients The SEC claimed that AFI Doglione and Shea violated Sections 206(2) and 206(4) of the Advisers Act As part of the settlement the parties without admitting or denying the Commissionrsquos findings agreed to censures and a total of $550000 in penalties AFI agreed to pay a civil monetary penalty of $250000 to notify existing and prospective clients of the SECrsquos order and to obtain an independent compliance consultant Doglione agreed to a civil monetary penalty of $250000 and Shea agreed to a civil monetary penalty of $2500062

Securities Enforcement 2015 Year-End Review Page 14

2 Conflicts of Interest

On July 24 2015 the SEC instituted a settled AP against investment adviser Dion Money Management LLC (Dion) for allegedly failing to disclose adequately to clients a compensation arrangement whereby Dion received payments from third parties when client assets were invested in certain mutual funds The SEC asserted that although Dion disclosed the conflict of interest it understated the maximum payment rate under the arrangements with third parties and omitted the possibility that investors would receive payments from multiple parties based on the same client assets The SEC found that Dion violated Sections 206(2) and 207 of the Advisers Act Without admitting or denying the SECrsquos findings Dion agreed to amend its disclosures to provide notice to its clients of the SECrsquos order and pay a civil monetary penalty of $50000 63

On August 6 2015 the SEC instituted a settled AP against Tri-Star Advisors (TSA) TSA CEO William T Payne and TSA president Jon C Vaughan for alleged violations of the Advisers Act The SEC alleged that TSA made investment recommendations to its clients and executed trades while charging clients a sales credit ie a percentage mark-up without disclosing the credit to clients Payne and Vaughan allegedly received 55 of the sales credit generated by each trade The SEC claimed that TSA violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and that Payne and Vaughan caused TSA to violate Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the Commissionrsquos findings the respondents agreed to pay $779149 to settle the SECrsquos claims TSA agreed to pay a $150000 civil monetary penalty Payne agreed to pay disgorgement of $142500 prejudgment interest of $323521 and a civil monetary penalty of $19563521 and Vaughan agreed to pay disgorgement of $232500 prejudgment interest of $527850 and a civil monetary penalty of $5000064

On August 10 2015 the SEC instituted a settled AP against an investment management company for allegedly failing to disclose a conflict The SEC claimed that an advisory client made a $50 million loan to a senior executive which the SEC claimed allowed the executive to personally participate in an acquisition led by the management companyrsquos parent Allegedly the management company subsequently invested certain other clientsrsquo funds in two transactions in which the advisory client had invested on different terms The SEC asserted

that the management company thus breached its fiduciary duty by failing to disclose the potential conflict of interest to both sets of clients The SEC also alleged that the management company violated the Advisers Act by inadvertently billing a client approximately $65 million in asset management fees on non-managed assets by inaccurately coding the non-managed assets Finally the SEC alleged that the management company failed to implement certain compliance policies and procedures enforce its code of ethics and maintain required books and records The SEC found that the management company violated Sections 206(2) 206(4) 204(a) and 204A of the Advisers Act and Rules 206(4)-7 204-2(a)(3) 204-2(a)(5) and 204A-1 thereunder The management company agreed to pay a $20 million penalty without admitting or denying the Commissionrsquos findings65

Also on September 29 2015 the SEC filed a complaint in federal court against Lee D Weiss and his investment advisory firm Family Endowment Partners LP (FEP) for allegedly misappropriating investments and concealing conflicts of interest Weiss and FEP allegedly advised their clients to make investments in companies Weiss owned and controlled without telling the clients of their relationship to the companies The SEC claimed that Weiss and FEP then used the investment funds to pay FEPrsquos financial obligations and delinquent interest owed to other clients The SEC further claimed Weiss and FEP advised clients to invest approximately $5 million in a portfolio of consumer loans with a company that offered to pay an annual return of 18 but Weiss structured the investments so his clients received only 9 while he pocketed the remaining 9 The SEC claimed that Weiss and FEP violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Sections 206(1) 206(2) 206(3) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and Section 204(b)(5) of the Advisers Act and Rule 204-1 thereunder The SEC is seeking disgorgement from Weiss FEB and several companies owned by Weiss66 The action is ongoing

On September 30 2015 the SEC settled claims against Focus Media Holding Ltd (Focus) a China-based advertising company and its founder Jason Jiang The SEC alleged Focus and Jiang failed to adequately disclose the partial sale of securities of Focusrsquos wholly owned subsidiary Allyes Online Media Holdings Ltd (Allyes) to certain Allyes and Focus insiders before the securities

Securities Enforcement 2015 Year-End Review Page 15

were sold to a private equity firm Allegedly the securities were sold to the private equity firm at approximately six times the price the insiders had paid for the securities The SEC alleged that the failure to disclose the sales to insiders violated the reporting and antifraud provisions of the federal securities laws Without admitting or denying the SECrsquos allegations Focus agreed to pay a civil monetary penalty of $346 million and Jiang agreed to pay a civil monetary penalty of $969 million disgorgement of $9690000 and prejudgment interest of $164786567

On October 16 2015 the SEC filed a civil injunctive action in federal court in the District of Colorado against Donald J Lester and his private equity firm alleging violations of the federal securities laws The SEC alleged that starting in January 2010 and continuing for five years Lester and his firm sold unregistered securities in two investment funds they managed CFI Fund LLC (CFI) and NuPower LLC (NuPower) raising approximately $10 million The SEC further alleged that the funds acted as unregistered investment companies and neither Lester nor his firm were registered as brokers or associated with registered brokers while trading in securities Additionally Lester purportedly devised a fraudulent scheme to use $28 million of CFI investment funds to meet his firmrsquos repayment obligation to a group of investment funds called Equity Edge that Lesterrsquos firm guaranteed Specifically the SEC alleged that Lesterrsquos firm transferred NuPower to Equity Edge for no consideration after which CFI purchased a 50 interest in NuPower from Equity Edge for $28 million CFIrsquos investors allegedly were not informed about the conflict of interest in the transaction or about the purchase The SEC is seeking among other relief permanent injunctions civil monetary penalties and disgorgement with prejudgment interest68 The action is pending

On June 29 2015 the SEC filed a settled AP against Welhouse amp Associates Inc (WAI) a state-registered investment adviser and its owner principal and CCO Mark Welhouse for an alleged ldquocherry-pickingrdquo scheme which purportedly violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act According to the SEC from February 2010 until January 2013 Welhouse and his firm allocated options trades in an SampP 500 exchange traded fund in a manner that violated his fiduciary duty Specifically the SEC claims that Welhouse disproportionately allocated profitable trades to his

personal and business accounts and allocated unprofitable trades to his advisory clients Welhouse allegedly made this unfair allocation through purchasing options in an omnibus account and delaying allocation of the purchases until after the value of the trades could be determined Without admitting or denying the SECrsquos findings Welhouse and WAI agreed to jointly and severally pay disgorgement of $418141 prejudgment interest of $5091860 and a $300000 civil monetary penalty In addition WAI was censured and Welhouse was barred from the securities industry69

3 Custody and Compliance Rules of the Advisers Act

On August 6 2015 the SEC instituted a settled AP against Reid S Johnson founder sole owner president and managing director of The Planning Group of Scottsdale LLC (TPGS) an Arizona-based investment adviser for allegedly aiding and abetting violations of Rules 206(4)-2 (the Custody Rule) and 206(4)-7 (the Compliance Rule) under the Advisers Act The Custody Rule imposes detailed requirements governing the manner in which a SEC-registered investment adviser must hold client assets and related obligations The Compliance Rule requires registered investment advisers to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act by the adviser and any of its supervised persons

The SEC alleged that TPGS violated the Custody Rule by failing to accurately determine the securities over which it had custody and by failing to ensure that the securities were maintained by a qualified custodian The SEC also charged that TPGS violated the Compliance Rule by failing to maintain an adequate compliance manual because TPGSrsquos compliance manual did not address the 2009 amendments to the custody rule Finally the SEC charged that TPGS and Johnson willfully made materially false representations in TPGSrsquos Forms ADV from 2010 through 201270 The action is ongoing

On August 6 2015 the SEC instituted a settled AP against a Texas-based investment advisory firm its sole owner and manager John P Bott and its former Chief Compliance Officer F Robert Falkenberg for allegedly violating the principal transaction prohibitions and Custody and Compliance Rules under the Advisers Act The SEC claimed that the investment advisory firm failed to provide any prior written disclosure or obtain consent from clients for at least 2000 securities transactions and

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 3

II Significant Enforcement Division Developments

A Change in Commissioners

Commissioners Luis Aguilar (Democrat) and Daniel Gallagher (Republican) left the SEC in the second half of 2015 On October 20 2015 President Obama nominated Hester Peirce a former aide to Senate Banking Committee Chairman Richard Shelby (R-Ala) and current senior research fellow at the Mercatus Center at George Mason University (a free-market-oriented think tank) and Lisa Fairfax a former member of the Financial Industry Regulatory Authorityrsquos (FINRA) National Adjudicatory Council and current George Washington University Law professor If Peirce and Fairfax are confirmed four of the SECrsquos five commissioners would be women for the first time and Fairfax would be the third African-American commissioner in SEC history7

The simultaneous departure of Gallagher and Aguilar is particularly notable because the two held sharply different views on a number of policy matters including recent enforcement actions against compliance officers (which we discuss in Section IIH below) Although it is unclear how Peirce and Fairfax will approach this and other issues the partisan interests that supported each nomination strongly suggests that they will have divergent policy views as well largely mirroring Gallagherrsquos and Aguilarrsquos enforcement philosophies

Peirce was nominated at the recommendation of the Senate Banking Committee headed by Senator Shelby She has been critical of the financial regulatory agenda promoted by Senator Elizabeth Warren (D-Mass) and other Democrats Indeed Peirce wrote Dodd-Frank What It Does and Why Itrsquos Flawed a book critiquing the landmark legislation signed in 2010 Fairfax on the other hand was championed by Senator Warren In 2011 Fairfax published a book of her own Shareholder Democracy A Primer on Shareholder Activism and Participation8

It is unclear when the Senate will hold confirmation votes on Peirce and Fairfax The Senate Banking Committee must first hold hearings on both nominees Although the confirmations of Peirce and Fairfax would result in the most diverse group of SEC commissioners in US history it seems unlikely that either nominee would change the current tenor and ideological divide within the Commission

B The SECrsquos Use of Administrative Proceedings

As we reported in our Mid-Year Review federal court challenges to the SECrsquos use of its in-house administrative court as a forum for litigating contested enforcement actions began to gain traction in 2015 These federal court successes together with the continued criticism from commentators appear to have directly led to changes to the AP process

First on September 24 2015 the SEC proposed amendments to ldquomodernizerdquo its AP process including by adjusting the deadlines to allow more time for discovery preparation for the hearing and issuance of an initial decision following the hearing and by granting the parties discretion to take limited depositions during the pre-hearing discovery period 9 While these procedural changes would alleviate some of the discovery disadvantages of APs they fall well short of providing respondents in APs with a reasonable opportunity to mount a defense particularly when viewed against those provided by the Federal Rules of Civil Procedure Nor does the SECrsquos proposal address recent district court decisions that have held that the Constitution requires that if an ALJ is going to preside over a litigated AP the ALJ must be appointed by the President of the United States the federal courts or the heads of federal departments Thus while the amendments may ldquomodernizerdquo APs the changes are by no means revolutionary

Second the SEC has begun to bring fewer cases as litigated APs For example between July and September 2015 the SEC brought only 11 of its contested cases as APs down from 40 during the same period in 201410 And it has seemingly stopped bringing litigated APs against non-regulated persons one of the most controversial aspects of its increase in APs from 2014

While proposed amendments to the AP rules and the Commissionrsquos reduced use of APs are significant developments they are not likely to stem the controversy over the SECrsquos use of APs Indeed the SEC recently received a stinging rebuke from the First Circuit in Flannery v SEC which reversed a controversial decision by the Commission that had reversed an ALJrsquos finding that the respondents in the AP had not violated the federal securities laws

Securities Enforcement 2015 Year-End Review Page 4

In Flannery v SEC the SEC alleged that two former employees of a custodian bank specializing in services to mutual funds made willful and material misrepresentations in an investor presentation and in letters to investors about an unregistered bond fund managed by the bank The fund was made up of asset-backed securities that substantially underperformed during the subprime mortgage crisis After a nearly three-week hearing the presiding ALJ found that (i) the respondents did not have ultimate authority over the documents containing the alleged misstatements and (ii) the documents themselves did not contain materially false or misleading statements or omissions The Enforcement Division appealed the ALJrsquos ruling to the Commission Chair White and the two Democratic commissioners then reversed the ALJ (over dissents from the two Republican Commissioners) finding that the respondents had committed fraud

Notwithstanding the generally deferential standard that applies to appeals from a Commission opinion the First Circuit rejected the Commissionrsquos findings concluding that the findings were not supported by substantial evidence The court noted that it would use a less deferential standard of review because the Commission had reached the opposite conclusion from its own ALJ rejected several of the Commissionrsquos factual findings and even found that the Commission had misread one of the communications at issue The court also emphasized that the SEC had not introduced any testimony from fund investors to support the position that certain statements at issue were misleading or material11 In short eight years after the conduct at issue and five years after the Commission issued an order instituting proceedings to begin an AP the First Circuit concluded that there was no evidence of fraud implicitly raising a question about the SECrsquos repeated claim that APs are appropriate because of its specialized expertise in evaluating alleged federal securities law violations

At the same time constitutional challenges concerning how ALJs are appointed continue to wind their way through the courts and could ultimately have a significant impact on the SECrsquos use of APs While the due process challenges based for example on claims that APs violate respondentsrsquo rights to jury trials have generally been unsuccessful respondents have achieved a measure of success in challenging the appointment of ALJs as unconstitutional pursuant to the Appointments Clause of Article II of the Constitution Under the Appointments Clause ldquoinferior officersrdquo or government officials

exercising significant authority pursuant to the laws of the United Statesrdquo12 must be appointed by the President the federal courts or the heads of the federal departments13 Respondents argue that ALJs are inferior officers and because they have not been appointed by the President SEC Commissioners or a federal court their appointment violates the Constitution

For example in Hill v SEC and Gray Financial Group Inc v SEC Judge Leigh Martin May of the Northern District of Georgia preliminarily enjoined the two APs finding that the SECrsquos hiring of ALJs (who exercise significant authority under the laws of the United States and their roles are specified by statute) violated the Appointments Clause because ALJs meet the Article II criteria that require appointment by the President the federal courts or the heads of federal departments14 The SEC appealed to the Eleventh Circuit which consolidated the Hill and Gray appeals and tentatively assigned them to the courtrsquos argument calendar for the week of February 22 2016

Other courts however have dismissed similar challenges as premature noting that judicial review is available at the conclusion of the administrative process For example in Bebo v SEC Judge Rudolph Randa of the Eastern District of Wisconsin dismissed a respondentrsquos action seeking to stop an AP for lack of subject matter jurisdiction finding that ldquo[i]f the process is constitutionally defective [respondent] can obtain relief before the Commission if not the court of appealsrdquo15 The Seventh Circuit affirmed on August 24 2015 and denied rehearing en banc on November 5 2015 Similarly in Jarkesy v SEC the DC Circuit ruled that district courts lack subject matter jurisdiction to entertain respondentsrsquo constitutional challenges prior to the conclusion of the AP 16 Judge Randarsquos analysis has been adopted by judges in the Southern District of New York (SDNY) including in Tilton v SEC17 Tilton is presently on appeal before the Second Circuit which signaled that it may take a different view from the Seventh and DC Circuits by staying the AP in Tilton the day after it heard oral argument in the appeal18

Securities Enforcement 2015 Year-End Review Page 5

C Admissions of Liability in Settled Cases

The SEC obtained admissions in 14 enforcement actions in 2015 mdash eight in the second half of the year The SEC still has yet to clarify its policy statements from June 18 2013 when it announced that it would demand admissions in settling enforcement actions where (1) the misconduct harmed large numbers of investors or placed investors or the market at risk of potentially serious harm (2) the alleged misconduct was egregious and intentional or (3) the defendant engaged in an unlawful obstruction of the Commissionrsquos investigative processes19 Settlements that included admissions in the second half of 2015 suggest that the SEC may be particularly focused on securing admissions where the alleged wrongdoing at issue interferes even unintentionally with the SECrsquos ability to investigate securities violations or where the alleged wrongdoing involves information that has the potential to affect a large number of investment decisions

For example on July 14 2015 the SEC filed a settled AP against an investment adviser for providing inaccurate trade data to its brokers which allegedly caused errors in the brokersrsquo books and records and in the ldquoblue sheetrdquo data the brokers submitted to the SEC The SEC claimed that the investment adviser adjusted the way its sales data system identified certain trades which caused some long sales to be erroneously shown as short sales According to the SECrsquos order the investment adviser inadvertently failed to appreciate that this adjustment would affect the data it sent to its brokers and in turn the brokersrsquo blue sheets The investment adviser admitted to the conduct and agreed to pay nearly $4493427 consisting of a civil monetary penalty of $425 million disgorgement of $214380 and prejudgment interest of $2904720

The settlement with the investment adviser was the second time in as many years that the SEC required an admission to settle an enforcement action involving unintentionally inaccurate blue sheet data The SEC had previously obtained an admission of wrongdoing on January 29 2014 from a broker-dealer for omitting trades from blue sheet data as a result of a computer error 21 Enforcement Division Director Ceresney emphasized in both settlement releases that the SEC relies on accurate blue sheet data in its regulation of the securities markets

Similarly on September 9 2015 as discussed more fully in Section IVC below the SEC filed a settled AP against BDO USA LLP (BDO) and five of its partners for allegedly ignoring red flags and issuing false and

misleading unqualified audit opinions 22 The firm admitted wrongdoing mdash the first time a public accounting firm has admitted to such conduct according to the SEC mdash and agreed to pay over $21 million to settle the claims Without admitting or denying the SECrsquos allegations the four audit partners who settled with the SEC paid a total of $65000 in monetary fines and agreed to be suspended from practicing before the SEC for varying periods of time In requiring that BDO admit wrongdoing the SEC seemed to focus on the central role audit reports play in investment decisions and thus how misleading audit reports could undermine the integrity of the securities market The SEC did not indicate why it took a different view as to the individuals

D Grants of ldquoBad-Actorrdquo Waivers

As discussed in our Mid-Year Review journalists politicians and even the SECrsquos own commissioners criticized the Commissionrsquos practice of consistently granting waivers from the disqualification provisions of the federal securities laws after multiple large financial institutions received waivers in the first half of 2015 following settlements with the Commission 23 These ldquobad-actorrdquo waivers allow defendants who are subject to certain administrative orders or injunctions or who have been convicted of specified crimes to continue to benefit from exceptions and safe harbors under the federal securities laws for which they would otherwise be disqualified such as Well-Known Seasoned Issuer (WKSI) status use of the safe harbor for forward-looking statements or use of certain exemptions under the federal securities law Supporters of waivers have generally argued that disqualification provisions are intended to protect markets from ongoing harm not punish defendants 24 while critics have complained that the waivers make certain firms ldquotoo big to barrdquo25

The SEC appeared to be continuing its prior policy of generally granting waiver requests in August when it granted a large financial institution a waiver after two of the bankrsquos affiliates settled claims that they allegedly understated the risks and suitability of investments for traditional bond investors (as discussed below in Section IVD) 26 On August 27 2015 however (now former) Commissioner Aguilar recommended that the SEC increase its use of conditional waivers which would impose certain limitations but would not fully disqualify a defendant to help dispel the notion that the breadth and severity of disqualification provisions have caused the

Securities Enforcement 2015 Year-End Review Page 6

Commission to routinely grant blanket waivers especially to large financial institutions

On December 18 2015 the SEC granted such a conditional waiver when it and the Commodity Futures Trading Commission (CFTC) settled with a large financial institution that had allegedly failed to tell clients that it was steering them to the bankrsquos own products which would allow the bank to earn higher fees As part of the settlement the bank agreed to pay a total of $307 million and made certain admissions In addition the Commission granted the institution a conditional waiver that would allow it to continue to act as an investment manager and placement agent for private funds that issue unregistered securities under Rule 506 of Regulation D of the Securities Act of 1933 (Securities Act) and would allow its affiliates to continue to conduct business under Rule 506 but subject to a number of conditions

First the SEC or CFTC can revoke the conditional waiver if the bank fails to comply with either agencyrsquos order or is the subject of any action triggering the disqualification provisions under the federal securities laws for a period of five years

Second the conditional waiver requires the bank to engage a compliance consultant for a five-year period to conduct a comprehensive review of the bankrsquos practices policies and procedures relating to its management and placement of unregistered securities under Rule 506 The compliance consultant must issue an annual report each year summarizing its findings which will be published on the Commissionrsquos website

Third the conditional waiver requires senior executives to assist in addressing identified compliance issues and certify that they have read the compliance consultantrsquos report27

The SECrsquos insistence on such terms suggests that the days of the Commission routinely granting broad unconditional waivers may be coming to an end The commentary by certain Commissioners about conditional waivers also indicates that the SEC will likely make greater use of conditional waivers in the coming months

Securities Enforcement 2015 Year-End Review Page 7

E Update on the SECrsquos Whistleblower Program

Notable whistleblower awards by the Commission in the second half of 2015 included an award on July 17 2015 of $3 million mdash the third-highest award ever under the Whistleblower Program mdash and an award of over $325000 on November 4 2015 28 In announcing the $325000 award the Commission included an admonition for future whistleblowers stating that ldquo[t]he whistleblower waited until after leaving [his employer] to come forward and agency officials say the award could have been higher had this whistleblower not hesitatedrdquo

The Commission announced a joint award of 20 of monetary sanctions to a pair of foreign whistleblowers on September 28 201529 and an award of 28 of sanctions to a separate whistleblower on September 29 201530 The announcements of these awards did not include specific amounts because monetary sanctions have yet to be collected

The SECrsquos Whistleblower Program also received a boost in 2015 from a decision by the Second Circuit regarding eligibility for anti-retaliation protection under Dodd-Frank The decision Berman v NeoOgilvy LLC deferred to the SECrsquos interpretation of ldquowhistleblowerrdquo in Dodd-Frank and held that a whistleblower could sue for retaliation under Dodd-Frank even if the whistleblower was retaliated against for disclosing information to an employer not the Commission31 The Second Circuit decision conflicts with the Fifth Circuitrsquos holding in Asadi v GE Energy that Dodd-Frankrsquos plain language only allowed an employee to sue for retaliation provisions if the employee was retaliated against for disclosing information to the SEC32

Berman could further the SECrsquos policy of encouraging internal reporting which is reflected in among other things Rule 21F-6(a)(4) of the Exchange Act which considers a whistleblowerrsquos participation in an entityrsquos internal reporting system a plus factor in determining the size of an award and Exchange Act Rule 21F-4(b)(7) which creates a 120-day ldquolook-back periodrdquo for whistleblowers who first report wrongdoing through an entityrsquos internal processes33 The look-back period allows a whistleblower to receive credit for reporting information as of the date of the internal report

Whistleblowers claiming to have been fired after reporting wrongdoing internally began bringing suits alleging violations of Dodd-Frankrsquos anti-retaliation provisions within a week of Berman For example on September 17 2015 a former branch manager at an international financial institution filed a whistleblower suit in the SDNY alleging that he had been fired after reporting a number of mortgage loans originated by unregistered loan officers in violation of federal mortgage laws34

Separately as the year came to a close reports emerged of a pending whistleblower award that could be the largest in the programrsquos history As described in Section IID above a large financial institution agreed to a $307 million settlement in December with the SEC and CFTC The actions against the bank reportedly stemmed from a whistleblower tip and based on the settlement amount the whistleblower could receive an award of over $90 million35 Even an award on the low end of the range however could easily surpass $30 million the highest award to date Such staggering awards can only boost the Whistleblower Programrsquos profile which could further increase reporting to the SEC

F Focus on Cybersecurity

In the spring of 2014 OCIE released a risk alert announcing that the SEC would examine registered broker-dealers and investment advisers to assess their cybersecurity preparedness 36 OCIE stated that its examinations would focus on cybersecurity governance identification and assessment of cybersecurity risks protection of networks and information risks associated with remote customer access and funds transfer requests risks associated with vendors and other third parties detection of unauthorized activity and experiences with certain cybersecurity threats OCIE completed its examinations on February 3 2015 and issued a report that criticized companies for failing to prevent cyberattacks notwithstanding written policies designed to prevent such attacks 37 The SECrsquos Division of Investment Management then released guidance for the protection of customer information that emphasized that broker-dealers and investment advisers should limit employee access to data employ encryption technologies and develop incident response plans38

Securities Enforcement 2015 Year-End Review Page 8

While the guidance was welcome it was arguably too general to be particularly useful much like the provisions of Rule 30(a) of Regulation S-P under the Securities Act (the Safeguards Rule) The Safeguards Rule generally requires that regulated entities adopt written policies and procedures that are reasonably designed to safeguard customer records and information However the rule does not define specific requirements for a reasonable cybersecurity program so it is possible that the mere event of a data breach is enough to show that a company lacks reasonably designed procedures Further even a large and sophisticated institution with an advanced cybersecurity policy still faces the risk of a cyberattack mdash and a potential violation of the Safeguards Rule mdash through the smaller less-sophisticated companies with which larger companies interact For example the hackers who stole customer data for 70 million of big-box retailer Targetrsquos customers in 2013 reportedly accessed Targetrsquos systems via the network of the small business responsible for Targetrsquos heating and air conditioning39

The SEC brought one of the first enforcement actions related to OCIErsquos cybersecurity review in the second half of 2015 and that action involved a third-party service provider Specifically on September 22 2015 the SEC instituted a settled AP against RT Jones Capital Equities Management Inc (RT Jones) for allegedly failing to adopt written policies and procedures reasonably designed to protect customer records and information in violation of the Safeguards Rule40 The SEC alleged that RT Jones stored sensitive personally identifiable information for over 100000 clients and other persons on a server hosted by a third-party vendor without adopting written policies and procedures for the security confidentiality or protection of that information The SEC also alleged that a July 22 2013 cyberattack left RT Jonesrsquos customersrsquo data vulnerable to theft Without admitting or denying the SECrsquos allegations RT Jones agreed to pay a $75000 civil monetary penalty Prior to the settlement RT Jones also engaged in remedial efforts by appointing an information security manager to oversee data security and protection and implementing a written information security policy

OCIE has announced that it will conduct a second round of cybersecurity reviews 41 which could lead to more enforcement actions With this additional review and the enforcement actions that are also likely to come calls may grow louder for the SEC to provide more detailed guidance on cybersecurity requirements

G Insider Trading in the Wake of United States v Newman

The Supreme Courtrsquos denial of certiorari in United States v Newman appeared to settle the debate over whether to succeed in an insider trading enforcement action where the SECrsquos only evidence of a personal benefit to the insider is the existence of a personal relationship with the tippee the SEC needed to offer ldquoproof of a meaningfully close personal relationship that generates an exchange that is objective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo42 The debate will continue for at least a few more months however as the Supreme Court recently granted certiorari in United States v Salman a case out of the Ninth Circuit that is likely to address the personal benefit standard set by the Second Circuit in Newman

The SEC may well seek to delay disposition of certain pending insider trading cases until the Supreme Court decides Salman as the SEC has felt the impact of Newman in recent cases On September 14 2015 the SEC suffered a rare defeat in an AP when an ALJ dismissed insider trading claims against Joseph Ruggieri a former trader at Wells Fargo Securities LLC ALJ Jason Patil found that although the SEC showed that Ruggieri traded on material non-public information on numerous occasions the allegations did not meet the SECrsquos burden under Newman to show that the corporate insider gave Ruggieri the information in exchange for a personal benefit ALJ Patil was not persuaded by the SECrsquos argument that Ruggieri received the information in exchange for positive feedback and instead found that it was more likely that Ruggierirsquos feedback was genuine and part of a standard practice as Ruggieri had given the corporate insider positive feedback even before being provided with material non-public information43

Newman may have also had a significant impact on the SECrsquos AP against Steven Cohen the former head of hedge fund SAC Capital Advisors LP (SAC Capital) which settled on January 8 2016 The SEC had alleged that during Cohenrsquos time at the helm of SAC Capital he failed to reasonably supervise high-performing traders Michael Steinberg and Mathew Martoma who had been criminally convicted of insider trading after jury trials The SECrsquos settlement order found that Cohen failed to supervise Martoma (Steinbergrsquos conviction was vacated after Newman for insufficient evidence of a personal benefit) ignored red flags that Martoma was engaged in insider

Securities Enforcement 2015 Year-End Review Page 9

trading and encouraged Martoma to talk to a doctor about nonpublic drug trial results to inform trading decisions

To settle the SECrsquos claims Cohen without admitting or denying wrongdoing agreed to retain an independent consultant to conduct periodic reviews of his family office firms to subject his firms to periodic SEC examinations and to be barred from supervising funds that manage outside money for two years The settlement allows the SEC to extend the time period during which Cohen must comply with these requirements in the event the Commission brings a new action against Cohen and requires any registered broker-dealer or investment advisor that retains Cohen in a supervisory capacity before 2020 to retain an independent consultant until the end of 201944

The SECrsquos AP against Cohen was perhaps the most anticipated AP in recent years and its sudden and surprising settlement which did not include a monetary penalty suggests that the Commission may have had serious concerns about its case in the wake of Newman

The continuing impact of Newman is now an open question in light of the Supreme Courtrsquos grant of certiorari in Salman The question as to which the Supreme Court granted certiorari in Salman is whether the personal benefit to the insider that is necessary to establish insider trading requires proof of an exchange that is ldquoobjective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo as the Second Circuit held in Newman45 The Ninth Circuitrsquos opinion in Salman written by SDNY Judge Jed Rakoff (sitting by designation) can be easily distinguished from Newman on its facts as it did not involve a remote tippee who lacked knowledge of any personal relationship between the insider and immediate tippee and because the personal relationship between tipper and tippee appeared to be far more meaningful than in Newman 46 Nevertheless the Supreme Courtrsquos decision may reach more broadly than the facts of either case to bring some clarity to insider trading law which could be a welcome development by all A decision in Salman is expected by the end of the Supreme Courtrsquos current term in June 2016

H Focus on Compliance Officers

The SECrsquos pursuit of enforcement actions against compliance professionals was one of the most divisive issues of 2015 As we reported in our Mid-Year Review after having typically limited enforcement actions against individuals with compliance authority to those who also had other management responsibilities or in cases of actual fraud the SEC brought claims in the first half of 2015 against individuals responsible solely for compliance and in the context of their compliance roles This sparked public statements of dissent and criticism from Commissioner Gallagher Commissioner Aguilar responded with a statement addressing the criticism and reassuring compliance professionals that the SEC was not interested in bringing enforcement actions against compliance professionals who were obeying the law and fulfilling their responsibilities Chair White added her voice to the debate on July 14 2015 assuring compliance professionals that ldquo[w]e do not bring cases based on second guessing compliance officersrsquo good faith judgments but rather when their actions or inactions cross a clear line that deserve sanctionrdquo47 And on November 4 2015 Enforcement Director Ceresney attempting to assuage the fears of compliance officers who worry they will be targeted reiterated that the overwhelming majority of the cases the SEC brings involve compliance officers who crossed a clear line by engaging in affirmative misconduct or obstructing regulators48

On August 5 2015 in an action illustrative of the types of acts that appear to result in enforcement actions against compliance officers ALJ Cameron Elliot found that Judy Wolf a former investment bank compliance officer aided and abetted her employerrsquos violation of the books and records provisions of the Exchange Act by altering documents during an SEC investigation After learning that the SEC was investigating Wolf admitted to altering her notes regarding a review of securities trades in a fast food chain restaurantrsquos stock that she did not flag for her superiors by including reports of takeover rumors that would have bolstered a conclusion that the trades were improper Although ALJ Elliot found that Wolf violated the Exchange Act he declined to sanction her because among other things he concluded that her violations were isolated and not egregious ALJ Elliot noted that some factors favored sanctions but held that Wolf was a low-level employee and sanctions would allow her employer to label her a ldquobad applerdquo and move on without examining its practices ALJ Elliot further alluded to the

Securities Enforcement 2015 Year-End Review Page 10

ongoing debate over the Commissionrsquos policy of bringing actions against compliance personnel by noting that sanctioning low-hanging fruit like Wolf could discourage competent persons from taking compliance positions49

On August 6 2015 the SEC agreed to settle claims it had brought against an investment advisory firm its CEO John P Bott II and its chief compliance officer Robert Falkenberg50 In March 2011 the SEC asked Falkenberg to provide copies of his 2010 review of the firmrsquos policies and procedures which Falkenberg allegedly told the Commission that he had conducted in February 2011 A review of the firmrsquos metadata however allegedly revealed that Falkenberg had not actually conducted his review until April 2011 and had only spent a few hours drafting his report which he never sent to the firmrsquos CEO The SEC claimed the firm had violated Sections 206(3) 206(4) and 206(4)(A) of the Investment Advisers Act of 1940 (the Advisers Act) and Rules 206(4)-2 206(4)-7 and 206(4)A-1 thereunder and that Bott and Falkenberg had aided and abetted the firmrsquos violations Pursuant to the settlement Bott agreed to pay $450000 in disgorgement to the firmrsquos clients plus prejudgment interest and Bott Falkenberg and the firm were ordered to pay civil monetary penalties in the amounts of $70000 $40000 and $200000 respectively for a total of more than $760000 Falkenberg was also required to complete 30 hours of compliance training for his alleged failure to monitor the firm by conducting an annual review of its policies and procedures

In addition to its recent actions involving compliance officers the SEC has been scrutinizing investment advisersrsquo growing use of outside CCOs For example on November 9 2015 OCIE released a report finding that several outsourced CCOs had not effectively implemented compliance programs for which they were responsible51 In its risk alert OCIE reported that ldquocertain outsourced CCOs could not articulate the business or compliance risksrdquo their firms faced or whether the firms had adopted written policies and procedures to mitigate those risks52 In other instances outside CCOs were not tailoring program templates to the adviserrsquos business meaning that the compliance materials were not applicable to the firm The SEC concluded that advisers with outsourced CCOs should review their business practices to ensure that CCOs have enough authority to implement compliance programs and policies

Even if the SEC follows through with its assurances that only compliance officers who cross a ldquoclear linerdquo will face

enforcement action the number of regulatory lines now drawn for compliance officers mdash and their new focus on outsourced compliance programs mdash makes it clear that this remains an area of heightened enforcement risk

III Selected Judicial Developments Several judicial opinions of significance to the SECrsquos enforcement program were issued in the second half of 2015 and we summarize four of the most significant opinions below First the DC Circuit held that the SEC could not retroactively apply the remedial provisions of Dodd-Frank concerning industry bars to punish conduct that occurred before Dodd-Frank was enacted Second the DC Circuit in a separate case held that Section 4E of the Exchange Act does not set a limitation period for the SEC to bring an enforcement action after issuing a Wells notice Third the Second Circuit issued a long-awaited decision in an appeal of a securities fraud conviction in Litvak that while coming in a criminal case will likely allow the SEC to continue to push the envelope for what constitutes a material misstatement Finally Judge Pauley of the SDNY criticized the SEC for its use of an asset freeze in connection with the collapse of a Cayman Islands bank

A Koch v SEC

On July 14 2015 the DC Circuit ruled in Koch v SEC that the SEC could not use remedial provisions of Dodd-Frank to punish an investment adviser for conduct that occurred before Dodd-Frank was enacted53 The SEC had instituted an AP against Donald Koch and his firm Koch Asset Management (KAM) alleging that Koch engaged in a scheme to manipulate the prices of stocks in which KAM had invested Koch purportedly instructed his broker on two different occasions in 2009 to increase the frequency of the brokerrsquos bids on stocks at the end of the trading day which had the effect of inflating the stocksrsquo prices The SEC alleged that Koch and KAM violated Section 10(b) of the Exchange Act and Section 206(1) of the Investment Company Act and requested among other things that Koch be barred from the securities industry

Prior to Dodd-Frank the SEC had the authority to bar individuals from associating with a subset of securities industry participants including broker-dealers and investment advisers Dodd-Frank however expanded the SECrsquos authority to bar individuals from associating with municipal advisors and ratings organizations a power it did not have prior to the passage of Dodd-Frank

Securities Enforcement 2015 Year-End Review Page 11

Although Kochrsquos alleged market manipulation occurred in 2009 a year before Dodd-Frank the SEC sought to bar Koch from the securities industry pursuant to its authority under Dodd-Frank

The presiding ALJ found that Koch engaged in market manipulation but only imposed a limited industry bar that barred Koch from associating with investment advisers Koch appealed to the Commission which not only affirmed the ALJrsquos findings but also expanded the industry bar imposed on Koch to include municipal advisers and ratings organizations Koch appealed the Commissionrsquos ruling to the DC Circuit which also affirmed that Koch had engaged in market manipulation but reversed the Commissionrsquos expansion of Kochrsquos industry bar The panel held that the SEC could not use Dodd-Frank to penalize Koch for conduct that occurred before the statute was enacted because Dodd-Frank did not expressly allow the SEC to apply its provisions retroactively and expanding Kochrsquos industry bar would ldquowould impair rights [Koch] possessed when he acted increase [Kochrsquos] liability for past conduct or impose new duties with respect to transactions already completedrdquo

A week after the DC Circuit ruled Commissioners Gallagher and Piwowar who had dissented from the SECrsquos order expanding Kochrsquos industry bar said in a joint statement that they were ldquopleasedrdquo with the courtrsquos holding and urged the SEC to address ldquoall impermissibly retroactive collateral bars that have been misapplied since the enactment of Dodd-Frankrdquo54

B Montford v SEC

On July 21 2015 the DC Circuit issued its opinion in Montford v SEC holding that the requirement under Section 4E of the Exchange Act that enforcement proceedings be brought within 180 days of a Wells notice (enacted with Dodd Frank) is not an enforceable jurisdictional requirement 55 Montford arose from an appeal of a final order from the Commission finding that respondents violated Sections 204 206 and 207 of the Advisors Act for among other things allegedly failing to disclose the receipt of fees from an investment manager while disclosing to customers that it was ldquoindependentrdquo and ldquoconflict freerdquo The Commission barred respondents from the securities industry required the disgorgement of $210000 and imposed civil penalties56

Respondents appealed the Commissionrsquos order to the DC Circuit raising two challenges each of which the court rejected First respondents argued that the institution of administrative proceedings more than 180 days after issuing a Wells notice violated Section 4E of the Exchange Act and required dismissal Section 4E of the Exchange Act provides that ldquo[n]ot later than 180 days after the date on which Commission staff provide a written Wells notification to any person the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent not to file an actionrdquo The deadline of Section 4E may be extended by the Director of the Division of Enforcement ldquofor certain complex actionsrdquo which the Commission submitted happened in the instant case 57 Without reaching the issue of whether the Commission properly extended the Section 4E deadline the court found that Section 4E of the Exchange Act was ambiguous as to whether its violation served to bar an action by the Commission Accordingly the court concluded that under Chevron the Commissionrsquos interpretation that Section 4E is not a jurisdictional bar was entitled to deference as long as it was reasonable which the court found it was

Second respondents argued that the Commission abused its discretion in imposing civil penalties and ordering disgorgement because in respondentsrsquo view the receipt of money was not illegal and there was no causal link between the Commissionrsquos order of penalties and disgorgement and the alleged nondisclosure The court rejected this argument too noting that the Commission has flexibility in imposing such penalties which will be upheld as long as they are reasonable

Because the Enforcement Division is generally diligent about ensuring that enforcement actions are filed within 180 days of a Wells notice (or seeking an extension from the Division Director) Montford may have limited practical impact More surprising is arguably the judicial finding of ambiguity in a statute that left little room for interpretation

C SEC v Caledonian Bank

On November 10 2015 in SEC v Caledonian Bank Judge William H Pauley III of the Southern District of New York denied the defendantsrsquo motion to dismiss an SEC complaint that defendants had engaged in unregistered sales of securities in violation of Sections 5(a) and 5(c) of the Securities Act as part of an alleged

Securities Enforcement 2015 Year-End Review Page 12

penny stock ldquopump-and-dumprdquo scheme that the SEC claimed netted them profits of $75 million According to the SEC the defendants allegedly aggressively marketed the stocks of four companies that contained few assets using a series of sham transactions to conceal beneficial ownership of the securities before offering them to the public The opinion on a motion to dismiss would likely be of limited interest if only considered for its holding

In declining to dismiss the pending case however Judge William H Pauley III aggressively criticized the SECrsquos failure to coordinate its enforcement efforts which he stated led to unintended consequences and collateral victims According to the courtrsquos opinion at the same time a team of Washington DC-based SEC attorneys had persuaded Judge Pauley in February 2015 to freeze the assets of a Cayman Islands bank that allegedly sold the fraudulent securities another team of New York-based SEC attorneys who were investigating the some of the same defendants had information showing that the bank had not sold the securities for its own account but merely acted as a broker According to the Judge Pauley the freeze order (which was predicated in part on the belief that the bank had not acted as a broker) had the effect of bankrupting the bank shortly thereafter Judge Pauley blamed the SECrsquos ldquobureaucratic siloingrdquo for causing what he described as an unfortunate and unnecessary outcome In a broader criticism of the SEC Judge Pauley stated ldquoit is hard to believe that those charged with overseeing enforcement are not monitoring activities to avoid needless duplication of effortrdquo and that ldquo[g]iven the high stakes in securities enforcement actions and in the face of a workload the SEC describes as an lsquooverwhelming burdenrsquo a self-examination may be appropriaterdquo It remains to be seen what impact the criticism will have

D United States v Litvak

On December 8 2015 in a highly anticipated ruling the United States Court of Appeals for the Second Circuit reversed bond trader Jesse Litvakrsquos conviction on false statement charges and vacated his conviction on securities fraud charges58 The panel held that the trial court abused its discretion when it excluded critical expert testimony regarding pricing in the bond market which could have bolstered Litvakrsquos arguments that his allegedly false statements were not material The panel only vacated Litvakrsquos securities fraud conviction however rejecting his central argument that the statements at issue were immaterial as a matter of law The SEC had brought a parallel civil action against Litvak arising out of the same

allegations which remains on hold pending the outcome of Litvakrsquos criminal case59

The panelrsquos decision was not a complete win for Litvak and could have broad implications for future SEC actions Litvakrsquos central defense at trial and on appeal was that his alleged misrepresentations which related to the profit he stood to make from counterparties on bond transactions were immaterial as a matter of law Specifically he argued that the statements were immaterial as a matter of law because they related to how much Litvak paid for the securities himself and had no impact on the value of the securities themselves Put another way Litvak argued that counterparties could not have considered his false statements important because they did not pertain to any objective valuation of the underlying securities

The panel rejected Litvakrsquos arguments pointing to testimony from Litvakrsquos counterparties who stated that Litvakrsquos alleged misstatements were ldquoimportantrdquo to them and that the counterparties were injured by those misrepresentations by ultimately paying more than they would otherwise have bid for the securities Even though Litvak had credibly argued that the kind of statements at issue were a common business practice that should have had no relevance to pricing the panel concluded the testimony precluded a finding that no reasonable mind could find Litvakrsquos statements material And although the decision was not written as though it broke new ground the panelrsquos approach to materiality and deference to what investors considered to be important may have a lasting impact on the way the SEC pursues investigations by putting a greater focus on gathering evidence concerning investorsrsquo expectations At the same time the courtrsquos decision that excluding Litvakrsquos proffered materiality expert was an abuse of discretion will ensure that future defendants have more leeway to argue their positions in court

In sum while the district court cannot dismiss the remaining charges against Litvak on materiality grounds Litvak will have much more ammunition to fight these charges at trial And for future defendants (in both criminal and SEC actions) this opinion is a stark reminder that questions of materiality are highly fact-specific and that no misrepresentation should be presumed to be harmless or immune from prosecution

Securities Enforcement 2015 Year-End Review Page 13

IV Selected Significant Investigations and Cases

Below we highlight some of the more notable SEC enforcement actions from the latter half of 2015

A Investment Advisers

The SEC continued its especially vigorous oversight of investment advisers in 2015 It brought enforcement actions focused on representations of investment risk and performance disclosure of conflicts of interest the Custody and Compliance Rules of the Advisers Act and disclosure of fees and expenses while signaling a particularly increased focus on private equity

1 Misrepresentation of Investment Risk and Performance

On July 31 2015 the SEC filed a settled AP against a financial advisory firm and its founder Walter F Grenda Jr The SEC alleged that Grenda made false and misleading statements to the firmrsquos advisory clients in recommending and selling investments in a hedge fund called Prestige Wealth Management Fund LP (Prestige Fund) Grendarsquos statements allegedly misled clients into believing that the investments were less risky than they actually were Grenda also allegedly borrowed $175000 from two of his clients which the SEC claimed he misrepresented would be for business purposes but which he spent on personal expenses and debts In its settlement order the SEC found that the advisory firm and Grenda violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder The SEC also found that the advisory firm and Grenda violated Sections 206(1) and 206(2) of the Advisers Act and that Grenda willfully aided and abetted Prestige Fundrsquos violations of Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder The advisory firm was censured by the Commission and had its registration as an investment adviser revoked but did not pay any financial penalties Without admitting or denying wrongdoing Grenda agreed to pay $7741091 consisting of a $50000 civil monetary penalty and $2241091 in disgorgement and prejudgment interest60

On August 4 2015 the SEC instituted a settled AP against Gold Mountain LLC an investment adviser in Iowa and its founder Gregory Bied for allegedly defrauding investors through false statements in quarterly reports

Allegedly Gold Mountain and Bied made false statements from 2012 through mid-2014 to investors in a hedge fund managed by Gold Mountain namely that the fund was achieving positive quarterly returns when in fact the hedge fund had lost around 75 of its value over that time The SEC claimed that Gold Mountain and Bied violated Sections 9(b) and 206(4) of the Advisers Act Without admitting or denying the SECrsquos findings Gold Mountain and Bied consented to an industry bar and to pay a civil monetary penalty of $200000 which will be distributed to investors61

On November 30 2015 the SEC instituted settled APs against investment adviser Alpha Fiduciary Inc (AFI) Arthur Doglione AFIrsquos majority owner and president and Michael Shea AFIrsquos vice president and business development director The SEC alleged that AFIrsquos executive summaries firm profiles presentations and advertising materials contained certain hypothetical performance information but did not disclose that this data was completely hypothetical Moreover the SEC claimed that while some of AFIrsquos materials contained disclosure language the disclosure language did not appear on the same page as the hypothetical performance data rendering it misleading The SEC also found that although AFIrsquos compliance and procedures manual required the chief compliance officerrsquos prior review and approval of any marketing materials Doglione had exercised sole authority over AFIrsquos policies and procedures Thus the SEC alleged that he was solely responsible for the review and approval of AFIrsquos marketing materials prior to their distribution to clients or prospective clients The SEC also claimed that Shea knew that some of the data was hypothetical yet still included this information in materials he sent to clients Moreover Shea allegedly provided prospective clients with a report of an existing clientrsquos portfolio which represented a 144 return without taking any steps to determine if it was representative of the performance of other AFI clients The SEC claimed that AFI Doglione and Shea violated Sections 206(2) and 206(4) of the Advisers Act As part of the settlement the parties without admitting or denying the Commissionrsquos findings agreed to censures and a total of $550000 in penalties AFI agreed to pay a civil monetary penalty of $250000 to notify existing and prospective clients of the SECrsquos order and to obtain an independent compliance consultant Doglione agreed to a civil monetary penalty of $250000 and Shea agreed to a civil monetary penalty of $2500062

Securities Enforcement 2015 Year-End Review Page 14

2 Conflicts of Interest

On July 24 2015 the SEC instituted a settled AP against investment adviser Dion Money Management LLC (Dion) for allegedly failing to disclose adequately to clients a compensation arrangement whereby Dion received payments from third parties when client assets were invested in certain mutual funds The SEC asserted that although Dion disclosed the conflict of interest it understated the maximum payment rate under the arrangements with third parties and omitted the possibility that investors would receive payments from multiple parties based on the same client assets The SEC found that Dion violated Sections 206(2) and 207 of the Advisers Act Without admitting or denying the SECrsquos findings Dion agreed to amend its disclosures to provide notice to its clients of the SECrsquos order and pay a civil monetary penalty of $50000 63

On August 6 2015 the SEC instituted a settled AP against Tri-Star Advisors (TSA) TSA CEO William T Payne and TSA president Jon C Vaughan for alleged violations of the Advisers Act The SEC alleged that TSA made investment recommendations to its clients and executed trades while charging clients a sales credit ie a percentage mark-up without disclosing the credit to clients Payne and Vaughan allegedly received 55 of the sales credit generated by each trade The SEC claimed that TSA violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and that Payne and Vaughan caused TSA to violate Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the Commissionrsquos findings the respondents agreed to pay $779149 to settle the SECrsquos claims TSA agreed to pay a $150000 civil monetary penalty Payne agreed to pay disgorgement of $142500 prejudgment interest of $323521 and a civil monetary penalty of $19563521 and Vaughan agreed to pay disgorgement of $232500 prejudgment interest of $527850 and a civil monetary penalty of $5000064

On August 10 2015 the SEC instituted a settled AP against an investment management company for allegedly failing to disclose a conflict The SEC claimed that an advisory client made a $50 million loan to a senior executive which the SEC claimed allowed the executive to personally participate in an acquisition led by the management companyrsquos parent Allegedly the management company subsequently invested certain other clientsrsquo funds in two transactions in which the advisory client had invested on different terms The SEC asserted

that the management company thus breached its fiduciary duty by failing to disclose the potential conflict of interest to both sets of clients The SEC also alleged that the management company violated the Advisers Act by inadvertently billing a client approximately $65 million in asset management fees on non-managed assets by inaccurately coding the non-managed assets Finally the SEC alleged that the management company failed to implement certain compliance policies and procedures enforce its code of ethics and maintain required books and records The SEC found that the management company violated Sections 206(2) 206(4) 204(a) and 204A of the Advisers Act and Rules 206(4)-7 204-2(a)(3) 204-2(a)(5) and 204A-1 thereunder The management company agreed to pay a $20 million penalty without admitting or denying the Commissionrsquos findings65

Also on September 29 2015 the SEC filed a complaint in federal court against Lee D Weiss and his investment advisory firm Family Endowment Partners LP (FEP) for allegedly misappropriating investments and concealing conflicts of interest Weiss and FEP allegedly advised their clients to make investments in companies Weiss owned and controlled without telling the clients of their relationship to the companies The SEC claimed that Weiss and FEP then used the investment funds to pay FEPrsquos financial obligations and delinquent interest owed to other clients The SEC further claimed Weiss and FEP advised clients to invest approximately $5 million in a portfolio of consumer loans with a company that offered to pay an annual return of 18 but Weiss structured the investments so his clients received only 9 while he pocketed the remaining 9 The SEC claimed that Weiss and FEP violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Sections 206(1) 206(2) 206(3) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and Section 204(b)(5) of the Advisers Act and Rule 204-1 thereunder The SEC is seeking disgorgement from Weiss FEB and several companies owned by Weiss66 The action is ongoing

On September 30 2015 the SEC settled claims against Focus Media Holding Ltd (Focus) a China-based advertising company and its founder Jason Jiang The SEC alleged Focus and Jiang failed to adequately disclose the partial sale of securities of Focusrsquos wholly owned subsidiary Allyes Online Media Holdings Ltd (Allyes) to certain Allyes and Focus insiders before the securities

Securities Enforcement 2015 Year-End Review Page 15

were sold to a private equity firm Allegedly the securities were sold to the private equity firm at approximately six times the price the insiders had paid for the securities The SEC alleged that the failure to disclose the sales to insiders violated the reporting and antifraud provisions of the federal securities laws Without admitting or denying the SECrsquos allegations Focus agreed to pay a civil monetary penalty of $346 million and Jiang agreed to pay a civil monetary penalty of $969 million disgorgement of $9690000 and prejudgment interest of $164786567

On October 16 2015 the SEC filed a civil injunctive action in federal court in the District of Colorado against Donald J Lester and his private equity firm alleging violations of the federal securities laws The SEC alleged that starting in January 2010 and continuing for five years Lester and his firm sold unregistered securities in two investment funds they managed CFI Fund LLC (CFI) and NuPower LLC (NuPower) raising approximately $10 million The SEC further alleged that the funds acted as unregistered investment companies and neither Lester nor his firm were registered as brokers or associated with registered brokers while trading in securities Additionally Lester purportedly devised a fraudulent scheme to use $28 million of CFI investment funds to meet his firmrsquos repayment obligation to a group of investment funds called Equity Edge that Lesterrsquos firm guaranteed Specifically the SEC alleged that Lesterrsquos firm transferred NuPower to Equity Edge for no consideration after which CFI purchased a 50 interest in NuPower from Equity Edge for $28 million CFIrsquos investors allegedly were not informed about the conflict of interest in the transaction or about the purchase The SEC is seeking among other relief permanent injunctions civil monetary penalties and disgorgement with prejudgment interest68 The action is pending

On June 29 2015 the SEC filed a settled AP against Welhouse amp Associates Inc (WAI) a state-registered investment adviser and its owner principal and CCO Mark Welhouse for an alleged ldquocherry-pickingrdquo scheme which purportedly violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act According to the SEC from February 2010 until January 2013 Welhouse and his firm allocated options trades in an SampP 500 exchange traded fund in a manner that violated his fiduciary duty Specifically the SEC claims that Welhouse disproportionately allocated profitable trades to his

personal and business accounts and allocated unprofitable trades to his advisory clients Welhouse allegedly made this unfair allocation through purchasing options in an omnibus account and delaying allocation of the purchases until after the value of the trades could be determined Without admitting or denying the SECrsquos findings Welhouse and WAI agreed to jointly and severally pay disgorgement of $418141 prejudgment interest of $5091860 and a $300000 civil monetary penalty In addition WAI was censured and Welhouse was barred from the securities industry69

3 Custody and Compliance Rules of the Advisers Act

On August 6 2015 the SEC instituted a settled AP against Reid S Johnson founder sole owner president and managing director of The Planning Group of Scottsdale LLC (TPGS) an Arizona-based investment adviser for allegedly aiding and abetting violations of Rules 206(4)-2 (the Custody Rule) and 206(4)-7 (the Compliance Rule) under the Advisers Act The Custody Rule imposes detailed requirements governing the manner in which a SEC-registered investment adviser must hold client assets and related obligations The Compliance Rule requires registered investment advisers to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act by the adviser and any of its supervised persons

The SEC alleged that TPGS violated the Custody Rule by failing to accurately determine the securities over which it had custody and by failing to ensure that the securities were maintained by a qualified custodian The SEC also charged that TPGS violated the Compliance Rule by failing to maintain an adequate compliance manual because TPGSrsquos compliance manual did not address the 2009 amendments to the custody rule Finally the SEC charged that TPGS and Johnson willfully made materially false representations in TPGSrsquos Forms ADV from 2010 through 201270 The action is ongoing

On August 6 2015 the SEC instituted a settled AP against a Texas-based investment advisory firm its sole owner and manager John P Bott and its former Chief Compliance Officer F Robert Falkenberg for allegedly violating the principal transaction prohibitions and Custody and Compliance Rules under the Advisers Act The SEC claimed that the investment advisory firm failed to provide any prior written disclosure or obtain consent from clients for at least 2000 securities transactions and

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 4

In Flannery v SEC the SEC alleged that two former employees of a custodian bank specializing in services to mutual funds made willful and material misrepresentations in an investor presentation and in letters to investors about an unregistered bond fund managed by the bank The fund was made up of asset-backed securities that substantially underperformed during the subprime mortgage crisis After a nearly three-week hearing the presiding ALJ found that (i) the respondents did not have ultimate authority over the documents containing the alleged misstatements and (ii) the documents themselves did not contain materially false or misleading statements or omissions The Enforcement Division appealed the ALJrsquos ruling to the Commission Chair White and the two Democratic commissioners then reversed the ALJ (over dissents from the two Republican Commissioners) finding that the respondents had committed fraud

Notwithstanding the generally deferential standard that applies to appeals from a Commission opinion the First Circuit rejected the Commissionrsquos findings concluding that the findings were not supported by substantial evidence The court noted that it would use a less deferential standard of review because the Commission had reached the opposite conclusion from its own ALJ rejected several of the Commissionrsquos factual findings and even found that the Commission had misread one of the communications at issue The court also emphasized that the SEC had not introduced any testimony from fund investors to support the position that certain statements at issue were misleading or material11 In short eight years after the conduct at issue and five years after the Commission issued an order instituting proceedings to begin an AP the First Circuit concluded that there was no evidence of fraud implicitly raising a question about the SECrsquos repeated claim that APs are appropriate because of its specialized expertise in evaluating alleged federal securities law violations

At the same time constitutional challenges concerning how ALJs are appointed continue to wind their way through the courts and could ultimately have a significant impact on the SECrsquos use of APs While the due process challenges based for example on claims that APs violate respondentsrsquo rights to jury trials have generally been unsuccessful respondents have achieved a measure of success in challenging the appointment of ALJs as unconstitutional pursuant to the Appointments Clause of Article II of the Constitution Under the Appointments Clause ldquoinferior officersrdquo or government officials

exercising significant authority pursuant to the laws of the United Statesrdquo12 must be appointed by the President the federal courts or the heads of the federal departments13 Respondents argue that ALJs are inferior officers and because they have not been appointed by the President SEC Commissioners or a federal court their appointment violates the Constitution

For example in Hill v SEC and Gray Financial Group Inc v SEC Judge Leigh Martin May of the Northern District of Georgia preliminarily enjoined the two APs finding that the SECrsquos hiring of ALJs (who exercise significant authority under the laws of the United States and their roles are specified by statute) violated the Appointments Clause because ALJs meet the Article II criteria that require appointment by the President the federal courts or the heads of federal departments14 The SEC appealed to the Eleventh Circuit which consolidated the Hill and Gray appeals and tentatively assigned them to the courtrsquos argument calendar for the week of February 22 2016

Other courts however have dismissed similar challenges as premature noting that judicial review is available at the conclusion of the administrative process For example in Bebo v SEC Judge Rudolph Randa of the Eastern District of Wisconsin dismissed a respondentrsquos action seeking to stop an AP for lack of subject matter jurisdiction finding that ldquo[i]f the process is constitutionally defective [respondent] can obtain relief before the Commission if not the court of appealsrdquo15 The Seventh Circuit affirmed on August 24 2015 and denied rehearing en banc on November 5 2015 Similarly in Jarkesy v SEC the DC Circuit ruled that district courts lack subject matter jurisdiction to entertain respondentsrsquo constitutional challenges prior to the conclusion of the AP 16 Judge Randarsquos analysis has been adopted by judges in the Southern District of New York (SDNY) including in Tilton v SEC17 Tilton is presently on appeal before the Second Circuit which signaled that it may take a different view from the Seventh and DC Circuits by staying the AP in Tilton the day after it heard oral argument in the appeal18

Securities Enforcement 2015 Year-End Review Page 5

C Admissions of Liability in Settled Cases

The SEC obtained admissions in 14 enforcement actions in 2015 mdash eight in the second half of the year The SEC still has yet to clarify its policy statements from June 18 2013 when it announced that it would demand admissions in settling enforcement actions where (1) the misconduct harmed large numbers of investors or placed investors or the market at risk of potentially serious harm (2) the alleged misconduct was egregious and intentional or (3) the defendant engaged in an unlawful obstruction of the Commissionrsquos investigative processes19 Settlements that included admissions in the second half of 2015 suggest that the SEC may be particularly focused on securing admissions where the alleged wrongdoing at issue interferes even unintentionally with the SECrsquos ability to investigate securities violations or where the alleged wrongdoing involves information that has the potential to affect a large number of investment decisions

For example on July 14 2015 the SEC filed a settled AP against an investment adviser for providing inaccurate trade data to its brokers which allegedly caused errors in the brokersrsquo books and records and in the ldquoblue sheetrdquo data the brokers submitted to the SEC The SEC claimed that the investment adviser adjusted the way its sales data system identified certain trades which caused some long sales to be erroneously shown as short sales According to the SECrsquos order the investment adviser inadvertently failed to appreciate that this adjustment would affect the data it sent to its brokers and in turn the brokersrsquo blue sheets The investment adviser admitted to the conduct and agreed to pay nearly $4493427 consisting of a civil monetary penalty of $425 million disgorgement of $214380 and prejudgment interest of $2904720

The settlement with the investment adviser was the second time in as many years that the SEC required an admission to settle an enforcement action involving unintentionally inaccurate blue sheet data The SEC had previously obtained an admission of wrongdoing on January 29 2014 from a broker-dealer for omitting trades from blue sheet data as a result of a computer error 21 Enforcement Division Director Ceresney emphasized in both settlement releases that the SEC relies on accurate blue sheet data in its regulation of the securities markets

Similarly on September 9 2015 as discussed more fully in Section IVC below the SEC filed a settled AP against BDO USA LLP (BDO) and five of its partners for allegedly ignoring red flags and issuing false and

misleading unqualified audit opinions 22 The firm admitted wrongdoing mdash the first time a public accounting firm has admitted to such conduct according to the SEC mdash and agreed to pay over $21 million to settle the claims Without admitting or denying the SECrsquos allegations the four audit partners who settled with the SEC paid a total of $65000 in monetary fines and agreed to be suspended from practicing before the SEC for varying periods of time In requiring that BDO admit wrongdoing the SEC seemed to focus on the central role audit reports play in investment decisions and thus how misleading audit reports could undermine the integrity of the securities market The SEC did not indicate why it took a different view as to the individuals

D Grants of ldquoBad-Actorrdquo Waivers

As discussed in our Mid-Year Review journalists politicians and even the SECrsquos own commissioners criticized the Commissionrsquos practice of consistently granting waivers from the disqualification provisions of the federal securities laws after multiple large financial institutions received waivers in the first half of 2015 following settlements with the Commission 23 These ldquobad-actorrdquo waivers allow defendants who are subject to certain administrative orders or injunctions or who have been convicted of specified crimes to continue to benefit from exceptions and safe harbors under the federal securities laws for which they would otherwise be disqualified such as Well-Known Seasoned Issuer (WKSI) status use of the safe harbor for forward-looking statements or use of certain exemptions under the federal securities law Supporters of waivers have generally argued that disqualification provisions are intended to protect markets from ongoing harm not punish defendants 24 while critics have complained that the waivers make certain firms ldquotoo big to barrdquo25

The SEC appeared to be continuing its prior policy of generally granting waiver requests in August when it granted a large financial institution a waiver after two of the bankrsquos affiliates settled claims that they allegedly understated the risks and suitability of investments for traditional bond investors (as discussed below in Section IVD) 26 On August 27 2015 however (now former) Commissioner Aguilar recommended that the SEC increase its use of conditional waivers which would impose certain limitations but would not fully disqualify a defendant to help dispel the notion that the breadth and severity of disqualification provisions have caused the

Securities Enforcement 2015 Year-End Review Page 6

Commission to routinely grant blanket waivers especially to large financial institutions

On December 18 2015 the SEC granted such a conditional waiver when it and the Commodity Futures Trading Commission (CFTC) settled with a large financial institution that had allegedly failed to tell clients that it was steering them to the bankrsquos own products which would allow the bank to earn higher fees As part of the settlement the bank agreed to pay a total of $307 million and made certain admissions In addition the Commission granted the institution a conditional waiver that would allow it to continue to act as an investment manager and placement agent for private funds that issue unregistered securities under Rule 506 of Regulation D of the Securities Act of 1933 (Securities Act) and would allow its affiliates to continue to conduct business under Rule 506 but subject to a number of conditions

First the SEC or CFTC can revoke the conditional waiver if the bank fails to comply with either agencyrsquos order or is the subject of any action triggering the disqualification provisions under the federal securities laws for a period of five years

Second the conditional waiver requires the bank to engage a compliance consultant for a five-year period to conduct a comprehensive review of the bankrsquos practices policies and procedures relating to its management and placement of unregistered securities under Rule 506 The compliance consultant must issue an annual report each year summarizing its findings which will be published on the Commissionrsquos website

Third the conditional waiver requires senior executives to assist in addressing identified compliance issues and certify that they have read the compliance consultantrsquos report27

The SECrsquos insistence on such terms suggests that the days of the Commission routinely granting broad unconditional waivers may be coming to an end The commentary by certain Commissioners about conditional waivers also indicates that the SEC will likely make greater use of conditional waivers in the coming months

Securities Enforcement 2015 Year-End Review Page 7

E Update on the SECrsquos Whistleblower Program

Notable whistleblower awards by the Commission in the second half of 2015 included an award on July 17 2015 of $3 million mdash the third-highest award ever under the Whistleblower Program mdash and an award of over $325000 on November 4 2015 28 In announcing the $325000 award the Commission included an admonition for future whistleblowers stating that ldquo[t]he whistleblower waited until after leaving [his employer] to come forward and agency officials say the award could have been higher had this whistleblower not hesitatedrdquo

The Commission announced a joint award of 20 of monetary sanctions to a pair of foreign whistleblowers on September 28 201529 and an award of 28 of sanctions to a separate whistleblower on September 29 201530 The announcements of these awards did not include specific amounts because monetary sanctions have yet to be collected

The SECrsquos Whistleblower Program also received a boost in 2015 from a decision by the Second Circuit regarding eligibility for anti-retaliation protection under Dodd-Frank The decision Berman v NeoOgilvy LLC deferred to the SECrsquos interpretation of ldquowhistleblowerrdquo in Dodd-Frank and held that a whistleblower could sue for retaliation under Dodd-Frank even if the whistleblower was retaliated against for disclosing information to an employer not the Commission31 The Second Circuit decision conflicts with the Fifth Circuitrsquos holding in Asadi v GE Energy that Dodd-Frankrsquos plain language only allowed an employee to sue for retaliation provisions if the employee was retaliated against for disclosing information to the SEC32

Berman could further the SECrsquos policy of encouraging internal reporting which is reflected in among other things Rule 21F-6(a)(4) of the Exchange Act which considers a whistleblowerrsquos participation in an entityrsquos internal reporting system a plus factor in determining the size of an award and Exchange Act Rule 21F-4(b)(7) which creates a 120-day ldquolook-back periodrdquo for whistleblowers who first report wrongdoing through an entityrsquos internal processes33 The look-back period allows a whistleblower to receive credit for reporting information as of the date of the internal report

Whistleblowers claiming to have been fired after reporting wrongdoing internally began bringing suits alleging violations of Dodd-Frankrsquos anti-retaliation provisions within a week of Berman For example on September 17 2015 a former branch manager at an international financial institution filed a whistleblower suit in the SDNY alleging that he had been fired after reporting a number of mortgage loans originated by unregistered loan officers in violation of federal mortgage laws34

Separately as the year came to a close reports emerged of a pending whistleblower award that could be the largest in the programrsquos history As described in Section IID above a large financial institution agreed to a $307 million settlement in December with the SEC and CFTC The actions against the bank reportedly stemmed from a whistleblower tip and based on the settlement amount the whistleblower could receive an award of over $90 million35 Even an award on the low end of the range however could easily surpass $30 million the highest award to date Such staggering awards can only boost the Whistleblower Programrsquos profile which could further increase reporting to the SEC

F Focus on Cybersecurity

In the spring of 2014 OCIE released a risk alert announcing that the SEC would examine registered broker-dealers and investment advisers to assess their cybersecurity preparedness 36 OCIE stated that its examinations would focus on cybersecurity governance identification and assessment of cybersecurity risks protection of networks and information risks associated with remote customer access and funds transfer requests risks associated with vendors and other third parties detection of unauthorized activity and experiences with certain cybersecurity threats OCIE completed its examinations on February 3 2015 and issued a report that criticized companies for failing to prevent cyberattacks notwithstanding written policies designed to prevent such attacks 37 The SECrsquos Division of Investment Management then released guidance for the protection of customer information that emphasized that broker-dealers and investment advisers should limit employee access to data employ encryption technologies and develop incident response plans38

Securities Enforcement 2015 Year-End Review Page 8

While the guidance was welcome it was arguably too general to be particularly useful much like the provisions of Rule 30(a) of Regulation S-P under the Securities Act (the Safeguards Rule) The Safeguards Rule generally requires that regulated entities adopt written policies and procedures that are reasonably designed to safeguard customer records and information However the rule does not define specific requirements for a reasonable cybersecurity program so it is possible that the mere event of a data breach is enough to show that a company lacks reasonably designed procedures Further even a large and sophisticated institution with an advanced cybersecurity policy still faces the risk of a cyberattack mdash and a potential violation of the Safeguards Rule mdash through the smaller less-sophisticated companies with which larger companies interact For example the hackers who stole customer data for 70 million of big-box retailer Targetrsquos customers in 2013 reportedly accessed Targetrsquos systems via the network of the small business responsible for Targetrsquos heating and air conditioning39

The SEC brought one of the first enforcement actions related to OCIErsquos cybersecurity review in the second half of 2015 and that action involved a third-party service provider Specifically on September 22 2015 the SEC instituted a settled AP against RT Jones Capital Equities Management Inc (RT Jones) for allegedly failing to adopt written policies and procedures reasonably designed to protect customer records and information in violation of the Safeguards Rule40 The SEC alleged that RT Jones stored sensitive personally identifiable information for over 100000 clients and other persons on a server hosted by a third-party vendor without adopting written policies and procedures for the security confidentiality or protection of that information The SEC also alleged that a July 22 2013 cyberattack left RT Jonesrsquos customersrsquo data vulnerable to theft Without admitting or denying the SECrsquos allegations RT Jones agreed to pay a $75000 civil monetary penalty Prior to the settlement RT Jones also engaged in remedial efforts by appointing an information security manager to oversee data security and protection and implementing a written information security policy

OCIE has announced that it will conduct a second round of cybersecurity reviews 41 which could lead to more enforcement actions With this additional review and the enforcement actions that are also likely to come calls may grow louder for the SEC to provide more detailed guidance on cybersecurity requirements

G Insider Trading in the Wake of United States v Newman

The Supreme Courtrsquos denial of certiorari in United States v Newman appeared to settle the debate over whether to succeed in an insider trading enforcement action where the SECrsquos only evidence of a personal benefit to the insider is the existence of a personal relationship with the tippee the SEC needed to offer ldquoproof of a meaningfully close personal relationship that generates an exchange that is objective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo42 The debate will continue for at least a few more months however as the Supreme Court recently granted certiorari in United States v Salman a case out of the Ninth Circuit that is likely to address the personal benefit standard set by the Second Circuit in Newman

The SEC may well seek to delay disposition of certain pending insider trading cases until the Supreme Court decides Salman as the SEC has felt the impact of Newman in recent cases On September 14 2015 the SEC suffered a rare defeat in an AP when an ALJ dismissed insider trading claims against Joseph Ruggieri a former trader at Wells Fargo Securities LLC ALJ Jason Patil found that although the SEC showed that Ruggieri traded on material non-public information on numerous occasions the allegations did not meet the SECrsquos burden under Newman to show that the corporate insider gave Ruggieri the information in exchange for a personal benefit ALJ Patil was not persuaded by the SECrsquos argument that Ruggieri received the information in exchange for positive feedback and instead found that it was more likely that Ruggierirsquos feedback was genuine and part of a standard practice as Ruggieri had given the corporate insider positive feedback even before being provided with material non-public information43

Newman may have also had a significant impact on the SECrsquos AP against Steven Cohen the former head of hedge fund SAC Capital Advisors LP (SAC Capital) which settled on January 8 2016 The SEC had alleged that during Cohenrsquos time at the helm of SAC Capital he failed to reasonably supervise high-performing traders Michael Steinberg and Mathew Martoma who had been criminally convicted of insider trading after jury trials The SECrsquos settlement order found that Cohen failed to supervise Martoma (Steinbergrsquos conviction was vacated after Newman for insufficient evidence of a personal benefit) ignored red flags that Martoma was engaged in insider

Securities Enforcement 2015 Year-End Review Page 9

trading and encouraged Martoma to talk to a doctor about nonpublic drug trial results to inform trading decisions

To settle the SECrsquos claims Cohen without admitting or denying wrongdoing agreed to retain an independent consultant to conduct periodic reviews of his family office firms to subject his firms to periodic SEC examinations and to be barred from supervising funds that manage outside money for two years The settlement allows the SEC to extend the time period during which Cohen must comply with these requirements in the event the Commission brings a new action against Cohen and requires any registered broker-dealer or investment advisor that retains Cohen in a supervisory capacity before 2020 to retain an independent consultant until the end of 201944

The SECrsquos AP against Cohen was perhaps the most anticipated AP in recent years and its sudden and surprising settlement which did not include a monetary penalty suggests that the Commission may have had serious concerns about its case in the wake of Newman

The continuing impact of Newman is now an open question in light of the Supreme Courtrsquos grant of certiorari in Salman The question as to which the Supreme Court granted certiorari in Salman is whether the personal benefit to the insider that is necessary to establish insider trading requires proof of an exchange that is ldquoobjective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo as the Second Circuit held in Newman45 The Ninth Circuitrsquos opinion in Salman written by SDNY Judge Jed Rakoff (sitting by designation) can be easily distinguished from Newman on its facts as it did not involve a remote tippee who lacked knowledge of any personal relationship between the insider and immediate tippee and because the personal relationship between tipper and tippee appeared to be far more meaningful than in Newman 46 Nevertheless the Supreme Courtrsquos decision may reach more broadly than the facts of either case to bring some clarity to insider trading law which could be a welcome development by all A decision in Salman is expected by the end of the Supreme Courtrsquos current term in June 2016

H Focus on Compliance Officers

The SECrsquos pursuit of enforcement actions against compliance professionals was one of the most divisive issues of 2015 As we reported in our Mid-Year Review after having typically limited enforcement actions against individuals with compliance authority to those who also had other management responsibilities or in cases of actual fraud the SEC brought claims in the first half of 2015 against individuals responsible solely for compliance and in the context of their compliance roles This sparked public statements of dissent and criticism from Commissioner Gallagher Commissioner Aguilar responded with a statement addressing the criticism and reassuring compliance professionals that the SEC was not interested in bringing enforcement actions against compliance professionals who were obeying the law and fulfilling their responsibilities Chair White added her voice to the debate on July 14 2015 assuring compliance professionals that ldquo[w]e do not bring cases based on second guessing compliance officersrsquo good faith judgments but rather when their actions or inactions cross a clear line that deserve sanctionrdquo47 And on November 4 2015 Enforcement Director Ceresney attempting to assuage the fears of compliance officers who worry they will be targeted reiterated that the overwhelming majority of the cases the SEC brings involve compliance officers who crossed a clear line by engaging in affirmative misconduct or obstructing regulators48

On August 5 2015 in an action illustrative of the types of acts that appear to result in enforcement actions against compliance officers ALJ Cameron Elliot found that Judy Wolf a former investment bank compliance officer aided and abetted her employerrsquos violation of the books and records provisions of the Exchange Act by altering documents during an SEC investigation After learning that the SEC was investigating Wolf admitted to altering her notes regarding a review of securities trades in a fast food chain restaurantrsquos stock that she did not flag for her superiors by including reports of takeover rumors that would have bolstered a conclusion that the trades were improper Although ALJ Elliot found that Wolf violated the Exchange Act he declined to sanction her because among other things he concluded that her violations were isolated and not egregious ALJ Elliot noted that some factors favored sanctions but held that Wolf was a low-level employee and sanctions would allow her employer to label her a ldquobad applerdquo and move on without examining its practices ALJ Elliot further alluded to the

Securities Enforcement 2015 Year-End Review Page 10

ongoing debate over the Commissionrsquos policy of bringing actions against compliance personnel by noting that sanctioning low-hanging fruit like Wolf could discourage competent persons from taking compliance positions49

On August 6 2015 the SEC agreed to settle claims it had brought against an investment advisory firm its CEO John P Bott II and its chief compliance officer Robert Falkenberg50 In March 2011 the SEC asked Falkenberg to provide copies of his 2010 review of the firmrsquos policies and procedures which Falkenberg allegedly told the Commission that he had conducted in February 2011 A review of the firmrsquos metadata however allegedly revealed that Falkenberg had not actually conducted his review until April 2011 and had only spent a few hours drafting his report which he never sent to the firmrsquos CEO The SEC claimed the firm had violated Sections 206(3) 206(4) and 206(4)(A) of the Investment Advisers Act of 1940 (the Advisers Act) and Rules 206(4)-2 206(4)-7 and 206(4)A-1 thereunder and that Bott and Falkenberg had aided and abetted the firmrsquos violations Pursuant to the settlement Bott agreed to pay $450000 in disgorgement to the firmrsquos clients plus prejudgment interest and Bott Falkenberg and the firm were ordered to pay civil monetary penalties in the amounts of $70000 $40000 and $200000 respectively for a total of more than $760000 Falkenberg was also required to complete 30 hours of compliance training for his alleged failure to monitor the firm by conducting an annual review of its policies and procedures

In addition to its recent actions involving compliance officers the SEC has been scrutinizing investment advisersrsquo growing use of outside CCOs For example on November 9 2015 OCIE released a report finding that several outsourced CCOs had not effectively implemented compliance programs for which they were responsible51 In its risk alert OCIE reported that ldquocertain outsourced CCOs could not articulate the business or compliance risksrdquo their firms faced or whether the firms had adopted written policies and procedures to mitigate those risks52 In other instances outside CCOs were not tailoring program templates to the adviserrsquos business meaning that the compliance materials were not applicable to the firm The SEC concluded that advisers with outsourced CCOs should review their business practices to ensure that CCOs have enough authority to implement compliance programs and policies

Even if the SEC follows through with its assurances that only compliance officers who cross a ldquoclear linerdquo will face

enforcement action the number of regulatory lines now drawn for compliance officers mdash and their new focus on outsourced compliance programs mdash makes it clear that this remains an area of heightened enforcement risk

III Selected Judicial Developments Several judicial opinions of significance to the SECrsquos enforcement program were issued in the second half of 2015 and we summarize four of the most significant opinions below First the DC Circuit held that the SEC could not retroactively apply the remedial provisions of Dodd-Frank concerning industry bars to punish conduct that occurred before Dodd-Frank was enacted Second the DC Circuit in a separate case held that Section 4E of the Exchange Act does not set a limitation period for the SEC to bring an enforcement action after issuing a Wells notice Third the Second Circuit issued a long-awaited decision in an appeal of a securities fraud conviction in Litvak that while coming in a criminal case will likely allow the SEC to continue to push the envelope for what constitutes a material misstatement Finally Judge Pauley of the SDNY criticized the SEC for its use of an asset freeze in connection with the collapse of a Cayman Islands bank

A Koch v SEC

On July 14 2015 the DC Circuit ruled in Koch v SEC that the SEC could not use remedial provisions of Dodd-Frank to punish an investment adviser for conduct that occurred before Dodd-Frank was enacted53 The SEC had instituted an AP against Donald Koch and his firm Koch Asset Management (KAM) alleging that Koch engaged in a scheme to manipulate the prices of stocks in which KAM had invested Koch purportedly instructed his broker on two different occasions in 2009 to increase the frequency of the brokerrsquos bids on stocks at the end of the trading day which had the effect of inflating the stocksrsquo prices The SEC alleged that Koch and KAM violated Section 10(b) of the Exchange Act and Section 206(1) of the Investment Company Act and requested among other things that Koch be barred from the securities industry

Prior to Dodd-Frank the SEC had the authority to bar individuals from associating with a subset of securities industry participants including broker-dealers and investment advisers Dodd-Frank however expanded the SECrsquos authority to bar individuals from associating with municipal advisors and ratings organizations a power it did not have prior to the passage of Dodd-Frank

Securities Enforcement 2015 Year-End Review Page 11

Although Kochrsquos alleged market manipulation occurred in 2009 a year before Dodd-Frank the SEC sought to bar Koch from the securities industry pursuant to its authority under Dodd-Frank

The presiding ALJ found that Koch engaged in market manipulation but only imposed a limited industry bar that barred Koch from associating with investment advisers Koch appealed to the Commission which not only affirmed the ALJrsquos findings but also expanded the industry bar imposed on Koch to include municipal advisers and ratings organizations Koch appealed the Commissionrsquos ruling to the DC Circuit which also affirmed that Koch had engaged in market manipulation but reversed the Commissionrsquos expansion of Kochrsquos industry bar The panel held that the SEC could not use Dodd-Frank to penalize Koch for conduct that occurred before the statute was enacted because Dodd-Frank did not expressly allow the SEC to apply its provisions retroactively and expanding Kochrsquos industry bar would ldquowould impair rights [Koch] possessed when he acted increase [Kochrsquos] liability for past conduct or impose new duties with respect to transactions already completedrdquo

A week after the DC Circuit ruled Commissioners Gallagher and Piwowar who had dissented from the SECrsquos order expanding Kochrsquos industry bar said in a joint statement that they were ldquopleasedrdquo with the courtrsquos holding and urged the SEC to address ldquoall impermissibly retroactive collateral bars that have been misapplied since the enactment of Dodd-Frankrdquo54

B Montford v SEC

On July 21 2015 the DC Circuit issued its opinion in Montford v SEC holding that the requirement under Section 4E of the Exchange Act that enforcement proceedings be brought within 180 days of a Wells notice (enacted with Dodd Frank) is not an enforceable jurisdictional requirement 55 Montford arose from an appeal of a final order from the Commission finding that respondents violated Sections 204 206 and 207 of the Advisors Act for among other things allegedly failing to disclose the receipt of fees from an investment manager while disclosing to customers that it was ldquoindependentrdquo and ldquoconflict freerdquo The Commission barred respondents from the securities industry required the disgorgement of $210000 and imposed civil penalties56

Respondents appealed the Commissionrsquos order to the DC Circuit raising two challenges each of which the court rejected First respondents argued that the institution of administrative proceedings more than 180 days after issuing a Wells notice violated Section 4E of the Exchange Act and required dismissal Section 4E of the Exchange Act provides that ldquo[n]ot later than 180 days after the date on which Commission staff provide a written Wells notification to any person the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent not to file an actionrdquo The deadline of Section 4E may be extended by the Director of the Division of Enforcement ldquofor certain complex actionsrdquo which the Commission submitted happened in the instant case 57 Without reaching the issue of whether the Commission properly extended the Section 4E deadline the court found that Section 4E of the Exchange Act was ambiguous as to whether its violation served to bar an action by the Commission Accordingly the court concluded that under Chevron the Commissionrsquos interpretation that Section 4E is not a jurisdictional bar was entitled to deference as long as it was reasonable which the court found it was

Second respondents argued that the Commission abused its discretion in imposing civil penalties and ordering disgorgement because in respondentsrsquo view the receipt of money was not illegal and there was no causal link between the Commissionrsquos order of penalties and disgorgement and the alleged nondisclosure The court rejected this argument too noting that the Commission has flexibility in imposing such penalties which will be upheld as long as they are reasonable

Because the Enforcement Division is generally diligent about ensuring that enforcement actions are filed within 180 days of a Wells notice (or seeking an extension from the Division Director) Montford may have limited practical impact More surprising is arguably the judicial finding of ambiguity in a statute that left little room for interpretation

C SEC v Caledonian Bank

On November 10 2015 in SEC v Caledonian Bank Judge William H Pauley III of the Southern District of New York denied the defendantsrsquo motion to dismiss an SEC complaint that defendants had engaged in unregistered sales of securities in violation of Sections 5(a) and 5(c) of the Securities Act as part of an alleged

Securities Enforcement 2015 Year-End Review Page 12

penny stock ldquopump-and-dumprdquo scheme that the SEC claimed netted them profits of $75 million According to the SEC the defendants allegedly aggressively marketed the stocks of four companies that contained few assets using a series of sham transactions to conceal beneficial ownership of the securities before offering them to the public The opinion on a motion to dismiss would likely be of limited interest if only considered for its holding

In declining to dismiss the pending case however Judge William H Pauley III aggressively criticized the SECrsquos failure to coordinate its enforcement efforts which he stated led to unintended consequences and collateral victims According to the courtrsquos opinion at the same time a team of Washington DC-based SEC attorneys had persuaded Judge Pauley in February 2015 to freeze the assets of a Cayman Islands bank that allegedly sold the fraudulent securities another team of New York-based SEC attorneys who were investigating the some of the same defendants had information showing that the bank had not sold the securities for its own account but merely acted as a broker According to the Judge Pauley the freeze order (which was predicated in part on the belief that the bank had not acted as a broker) had the effect of bankrupting the bank shortly thereafter Judge Pauley blamed the SECrsquos ldquobureaucratic siloingrdquo for causing what he described as an unfortunate and unnecessary outcome In a broader criticism of the SEC Judge Pauley stated ldquoit is hard to believe that those charged with overseeing enforcement are not monitoring activities to avoid needless duplication of effortrdquo and that ldquo[g]iven the high stakes in securities enforcement actions and in the face of a workload the SEC describes as an lsquooverwhelming burdenrsquo a self-examination may be appropriaterdquo It remains to be seen what impact the criticism will have

D United States v Litvak

On December 8 2015 in a highly anticipated ruling the United States Court of Appeals for the Second Circuit reversed bond trader Jesse Litvakrsquos conviction on false statement charges and vacated his conviction on securities fraud charges58 The panel held that the trial court abused its discretion when it excluded critical expert testimony regarding pricing in the bond market which could have bolstered Litvakrsquos arguments that his allegedly false statements were not material The panel only vacated Litvakrsquos securities fraud conviction however rejecting his central argument that the statements at issue were immaterial as a matter of law The SEC had brought a parallel civil action against Litvak arising out of the same

allegations which remains on hold pending the outcome of Litvakrsquos criminal case59

The panelrsquos decision was not a complete win for Litvak and could have broad implications for future SEC actions Litvakrsquos central defense at trial and on appeal was that his alleged misrepresentations which related to the profit he stood to make from counterparties on bond transactions were immaterial as a matter of law Specifically he argued that the statements were immaterial as a matter of law because they related to how much Litvak paid for the securities himself and had no impact on the value of the securities themselves Put another way Litvak argued that counterparties could not have considered his false statements important because they did not pertain to any objective valuation of the underlying securities

The panel rejected Litvakrsquos arguments pointing to testimony from Litvakrsquos counterparties who stated that Litvakrsquos alleged misstatements were ldquoimportantrdquo to them and that the counterparties were injured by those misrepresentations by ultimately paying more than they would otherwise have bid for the securities Even though Litvak had credibly argued that the kind of statements at issue were a common business practice that should have had no relevance to pricing the panel concluded the testimony precluded a finding that no reasonable mind could find Litvakrsquos statements material And although the decision was not written as though it broke new ground the panelrsquos approach to materiality and deference to what investors considered to be important may have a lasting impact on the way the SEC pursues investigations by putting a greater focus on gathering evidence concerning investorsrsquo expectations At the same time the courtrsquos decision that excluding Litvakrsquos proffered materiality expert was an abuse of discretion will ensure that future defendants have more leeway to argue their positions in court

In sum while the district court cannot dismiss the remaining charges against Litvak on materiality grounds Litvak will have much more ammunition to fight these charges at trial And for future defendants (in both criminal and SEC actions) this opinion is a stark reminder that questions of materiality are highly fact-specific and that no misrepresentation should be presumed to be harmless or immune from prosecution

Securities Enforcement 2015 Year-End Review Page 13

IV Selected Significant Investigations and Cases

Below we highlight some of the more notable SEC enforcement actions from the latter half of 2015

A Investment Advisers

The SEC continued its especially vigorous oversight of investment advisers in 2015 It brought enforcement actions focused on representations of investment risk and performance disclosure of conflicts of interest the Custody and Compliance Rules of the Advisers Act and disclosure of fees and expenses while signaling a particularly increased focus on private equity

1 Misrepresentation of Investment Risk and Performance

On July 31 2015 the SEC filed a settled AP against a financial advisory firm and its founder Walter F Grenda Jr The SEC alleged that Grenda made false and misleading statements to the firmrsquos advisory clients in recommending and selling investments in a hedge fund called Prestige Wealth Management Fund LP (Prestige Fund) Grendarsquos statements allegedly misled clients into believing that the investments were less risky than they actually were Grenda also allegedly borrowed $175000 from two of his clients which the SEC claimed he misrepresented would be for business purposes but which he spent on personal expenses and debts In its settlement order the SEC found that the advisory firm and Grenda violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder The SEC also found that the advisory firm and Grenda violated Sections 206(1) and 206(2) of the Advisers Act and that Grenda willfully aided and abetted Prestige Fundrsquos violations of Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder The advisory firm was censured by the Commission and had its registration as an investment adviser revoked but did not pay any financial penalties Without admitting or denying wrongdoing Grenda agreed to pay $7741091 consisting of a $50000 civil monetary penalty and $2241091 in disgorgement and prejudgment interest60

On August 4 2015 the SEC instituted a settled AP against Gold Mountain LLC an investment adviser in Iowa and its founder Gregory Bied for allegedly defrauding investors through false statements in quarterly reports

Allegedly Gold Mountain and Bied made false statements from 2012 through mid-2014 to investors in a hedge fund managed by Gold Mountain namely that the fund was achieving positive quarterly returns when in fact the hedge fund had lost around 75 of its value over that time The SEC claimed that Gold Mountain and Bied violated Sections 9(b) and 206(4) of the Advisers Act Without admitting or denying the SECrsquos findings Gold Mountain and Bied consented to an industry bar and to pay a civil monetary penalty of $200000 which will be distributed to investors61

On November 30 2015 the SEC instituted settled APs against investment adviser Alpha Fiduciary Inc (AFI) Arthur Doglione AFIrsquos majority owner and president and Michael Shea AFIrsquos vice president and business development director The SEC alleged that AFIrsquos executive summaries firm profiles presentations and advertising materials contained certain hypothetical performance information but did not disclose that this data was completely hypothetical Moreover the SEC claimed that while some of AFIrsquos materials contained disclosure language the disclosure language did not appear on the same page as the hypothetical performance data rendering it misleading The SEC also found that although AFIrsquos compliance and procedures manual required the chief compliance officerrsquos prior review and approval of any marketing materials Doglione had exercised sole authority over AFIrsquos policies and procedures Thus the SEC alleged that he was solely responsible for the review and approval of AFIrsquos marketing materials prior to their distribution to clients or prospective clients The SEC also claimed that Shea knew that some of the data was hypothetical yet still included this information in materials he sent to clients Moreover Shea allegedly provided prospective clients with a report of an existing clientrsquos portfolio which represented a 144 return without taking any steps to determine if it was representative of the performance of other AFI clients The SEC claimed that AFI Doglione and Shea violated Sections 206(2) and 206(4) of the Advisers Act As part of the settlement the parties without admitting or denying the Commissionrsquos findings agreed to censures and a total of $550000 in penalties AFI agreed to pay a civil monetary penalty of $250000 to notify existing and prospective clients of the SECrsquos order and to obtain an independent compliance consultant Doglione agreed to a civil monetary penalty of $250000 and Shea agreed to a civil monetary penalty of $2500062

Securities Enforcement 2015 Year-End Review Page 14

2 Conflicts of Interest

On July 24 2015 the SEC instituted a settled AP against investment adviser Dion Money Management LLC (Dion) for allegedly failing to disclose adequately to clients a compensation arrangement whereby Dion received payments from third parties when client assets were invested in certain mutual funds The SEC asserted that although Dion disclosed the conflict of interest it understated the maximum payment rate under the arrangements with third parties and omitted the possibility that investors would receive payments from multiple parties based on the same client assets The SEC found that Dion violated Sections 206(2) and 207 of the Advisers Act Without admitting or denying the SECrsquos findings Dion agreed to amend its disclosures to provide notice to its clients of the SECrsquos order and pay a civil monetary penalty of $50000 63

On August 6 2015 the SEC instituted a settled AP against Tri-Star Advisors (TSA) TSA CEO William T Payne and TSA president Jon C Vaughan for alleged violations of the Advisers Act The SEC alleged that TSA made investment recommendations to its clients and executed trades while charging clients a sales credit ie a percentage mark-up without disclosing the credit to clients Payne and Vaughan allegedly received 55 of the sales credit generated by each trade The SEC claimed that TSA violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and that Payne and Vaughan caused TSA to violate Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the Commissionrsquos findings the respondents agreed to pay $779149 to settle the SECrsquos claims TSA agreed to pay a $150000 civil monetary penalty Payne agreed to pay disgorgement of $142500 prejudgment interest of $323521 and a civil monetary penalty of $19563521 and Vaughan agreed to pay disgorgement of $232500 prejudgment interest of $527850 and a civil monetary penalty of $5000064

On August 10 2015 the SEC instituted a settled AP against an investment management company for allegedly failing to disclose a conflict The SEC claimed that an advisory client made a $50 million loan to a senior executive which the SEC claimed allowed the executive to personally participate in an acquisition led by the management companyrsquos parent Allegedly the management company subsequently invested certain other clientsrsquo funds in two transactions in which the advisory client had invested on different terms The SEC asserted

that the management company thus breached its fiduciary duty by failing to disclose the potential conflict of interest to both sets of clients The SEC also alleged that the management company violated the Advisers Act by inadvertently billing a client approximately $65 million in asset management fees on non-managed assets by inaccurately coding the non-managed assets Finally the SEC alleged that the management company failed to implement certain compliance policies and procedures enforce its code of ethics and maintain required books and records The SEC found that the management company violated Sections 206(2) 206(4) 204(a) and 204A of the Advisers Act and Rules 206(4)-7 204-2(a)(3) 204-2(a)(5) and 204A-1 thereunder The management company agreed to pay a $20 million penalty without admitting or denying the Commissionrsquos findings65

Also on September 29 2015 the SEC filed a complaint in federal court against Lee D Weiss and his investment advisory firm Family Endowment Partners LP (FEP) for allegedly misappropriating investments and concealing conflicts of interest Weiss and FEP allegedly advised their clients to make investments in companies Weiss owned and controlled without telling the clients of their relationship to the companies The SEC claimed that Weiss and FEP then used the investment funds to pay FEPrsquos financial obligations and delinquent interest owed to other clients The SEC further claimed Weiss and FEP advised clients to invest approximately $5 million in a portfolio of consumer loans with a company that offered to pay an annual return of 18 but Weiss structured the investments so his clients received only 9 while he pocketed the remaining 9 The SEC claimed that Weiss and FEP violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Sections 206(1) 206(2) 206(3) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and Section 204(b)(5) of the Advisers Act and Rule 204-1 thereunder The SEC is seeking disgorgement from Weiss FEB and several companies owned by Weiss66 The action is ongoing

On September 30 2015 the SEC settled claims against Focus Media Holding Ltd (Focus) a China-based advertising company and its founder Jason Jiang The SEC alleged Focus and Jiang failed to adequately disclose the partial sale of securities of Focusrsquos wholly owned subsidiary Allyes Online Media Holdings Ltd (Allyes) to certain Allyes and Focus insiders before the securities

Securities Enforcement 2015 Year-End Review Page 15

were sold to a private equity firm Allegedly the securities were sold to the private equity firm at approximately six times the price the insiders had paid for the securities The SEC alleged that the failure to disclose the sales to insiders violated the reporting and antifraud provisions of the federal securities laws Without admitting or denying the SECrsquos allegations Focus agreed to pay a civil monetary penalty of $346 million and Jiang agreed to pay a civil monetary penalty of $969 million disgorgement of $9690000 and prejudgment interest of $164786567

On October 16 2015 the SEC filed a civil injunctive action in federal court in the District of Colorado against Donald J Lester and his private equity firm alleging violations of the federal securities laws The SEC alleged that starting in January 2010 and continuing for five years Lester and his firm sold unregistered securities in two investment funds they managed CFI Fund LLC (CFI) and NuPower LLC (NuPower) raising approximately $10 million The SEC further alleged that the funds acted as unregistered investment companies and neither Lester nor his firm were registered as brokers or associated with registered brokers while trading in securities Additionally Lester purportedly devised a fraudulent scheme to use $28 million of CFI investment funds to meet his firmrsquos repayment obligation to a group of investment funds called Equity Edge that Lesterrsquos firm guaranteed Specifically the SEC alleged that Lesterrsquos firm transferred NuPower to Equity Edge for no consideration after which CFI purchased a 50 interest in NuPower from Equity Edge for $28 million CFIrsquos investors allegedly were not informed about the conflict of interest in the transaction or about the purchase The SEC is seeking among other relief permanent injunctions civil monetary penalties and disgorgement with prejudgment interest68 The action is pending

On June 29 2015 the SEC filed a settled AP against Welhouse amp Associates Inc (WAI) a state-registered investment adviser and its owner principal and CCO Mark Welhouse for an alleged ldquocherry-pickingrdquo scheme which purportedly violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act According to the SEC from February 2010 until January 2013 Welhouse and his firm allocated options trades in an SampP 500 exchange traded fund in a manner that violated his fiduciary duty Specifically the SEC claims that Welhouse disproportionately allocated profitable trades to his

personal and business accounts and allocated unprofitable trades to his advisory clients Welhouse allegedly made this unfair allocation through purchasing options in an omnibus account and delaying allocation of the purchases until after the value of the trades could be determined Without admitting or denying the SECrsquos findings Welhouse and WAI agreed to jointly and severally pay disgorgement of $418141 prejudgment interest of $5091860 and a $300000 civil monetary penalty In addition WAI was censured and Welhouse was barred from the securities industry69

3 Custody and Compliance Rules of the Advisers Act

On August 6 2015 the SEC instituted a settled AP against Reid S Johnson founder sole owner president and managing director of The Planning Group of Scottsdale LLC (TPGS) an Arizona-based investment adviser for allegedly aiding and abetting violations of Rules 206(4)-2 (the Custody Rule) and 206(4)-7 (the Compliance Rule) under the Advisers Act The Custody Rule imposes detailed requirements governing the manner in which a SEC-registered investment adviser must hold client assets and related obligations The Compliance Rule requires registered investment advisers to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act by the adviser and any of its supervised persons

The SEC alleged that TPGS violated the Custody Rule by failing to accurately determine the securities over which it had custody and by failing to ensure that the securities were maintained by a qualified custodian The SEC also charged that TPGS violated the Compliance Rule by failing to maintain an adequate compliance manual because TPGSrsquos compliance manual did not address the 2009 amendments to the custody rule Finally the SEC charged that TPGS and Johnson willfully made materially false representations in TPGSrsquos Forms ADV from 2010 through 201270 The action is ongoing

On August 6 2015 the SEC instituted a settled AP against a Texas-based investment advisory firm its sole owner and manager John P Bott and its former Chief Compliance Officer F Robert Falkenberg for allegedly violating the principal transaction prohibitions and Custody and Compliance Rules under the Advisers Act The SEC claimed that the investment advisory firm failed to provide any prior written disclosure or obtain consent from clients for at least 2000 securities transactions and

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 5

C Admissions of Liability in Settled Cases

The SEC obtained admissions in 14 enforcement actions in 2015 mdash eight in the second half of the year The SEC still has yet to clarify its policy statements from June 18 2013 when it announced that it would demand admissions in settling enforcement actions where (1) the misconduct harmed large numbers of investors or placed investors or the market at risk of potentially serious harm (2) the alleged misconduct was egregious and intentional or (3) the defendant engaged in an unlawful obstruction of the Commissionrsquos investigative processes19 Settlements that included admissions in the second half of 2015 suggest that the SEC may be particularly focused on securing admissions where the alleged wrongdoing at issue interferes even unintentionally with the SECrsquos ability to investigate securities violations or where the alleged wrongdoing involves information that has the potential to affect a large number of investment decisions

For example on July 14 2015 the SEC filed a settled AP against an investment adviser for providing inaccurate trade data to its brokers which allegedly caused errors in the brokersrsquo books and records and in the ldquoblue sheetrdquo data the brokers submitted to the SEC The SEC claimed that the investment adviser adjusted the way its sales data system identified certain trades which caused some long sales to be erroneously shown as short sales According to the SECrsquos order the investment adviser inadvertently failed to appreciate that this adjustment would affect the data it sent to its brokers and in turn the brokersrsquo blue sheets The investment adviser admitted to the conduct and agreed to pay nearly $4493427 consisting of a civil monetary penalty of $425 million disgorgement of $214380 and prejudgment interest of $2904720

The settlement with the investment adviser was the second time in as many years that the SEC required an admission to settle an enforcement action involving unintentionally inaccurate blue sheet data The SEC had previously obtained an admission of wrongdoing on January 29 2014 from a broker-dealer for omitting trades from blue sheet data as a result of a computer error 21 Enforcement Division Director Ceresney emphasized in both settlement releases that the SEC relies on accurate blue sheet data in its regulation of the securities markets

Similarly on September 9 2015 as discussed more fully in Section IVC below the SEC filed a settled AP against BDO USA LLP (BDO) and five of its partners for allegedly ignoring red flags and issuing false and

misleading unqualified audit opinions 22 The firm admitted wrongdoing mdash the first time a public accounting firm has admitted to such conduct according to the SEC mdash and agreed to pay over $21 million to settle the claims Without admitting or denying the SECrsquos allegations the four audit partners who settled with the SEC paid a total of $65000 in monetary fines and agreed to be suspended from practicing before the SEC for varying periods of time In requiring that BDO admit wrongdoing the SEC seemed to focus on the central role audit reports play in investment decisions and thus how misleading audit reports could undermine the integrity of the securities market The SEC did not indicate why it took a different view as to the individuals

D Grants of ldquoBad-Actorrdquo Waivers

As discussed in our Mid-Year Review journalists politicians and even the SECrsquos own commissioners criticized the Commissionrsquos practice of consistently granting waivers from the disqualification provisions of the federal securities laws after multiple large financial institutions received waivers in the first half of 2015 following settlements with the Commission 23 These ldquobad-actorrdquo waivers allow defendants who are subject to certain administrative orders or injunctions or who have been convicted of specified crimes to continue to benefit from exceptions and safe harbors under the federal securities laws for which they would otherwise be disqualified such as Well-Known Seasoned Issuer (WKSI) status use of the safe harbor for forward-looking statements or use of certain exemptions under the federal securities law Supporters of waivers have generally argued that disqualification provisions are intended to protect markets from ongoing harm not punish defendants 24 while critics have complained that the waivers make certain firms ldquotoo big to barrdquo25

The SEC appeared to be continuing its prior policy of generally granting waiver requests in August when it granted a large financial institution a waiver after two of the bankrsquos affiliates settled claims that they allegedly understated the risks and suitability of investments for traditional bond investors (as discussed below in Section IVD) 26 On August 27 2015 however (now former) Commissioner Aguilar recommended that the SEC increase its use of conditional waivers which would impose certain limitations but would not fully disqualify a defendant to help dispel the notion that the breadth and severity of disqualification provisions have caused the

Securities Enforcement 2015 Year-End Review Page 6

Commission to routinely grant blanket waivers especially to large financial institutions

On December 18 2015 the SEC granted such a conditional waiver when it and the Commodity Futures Trading Commission (CFTC) settled with a large financial institution that had allegedly failed to tell clients that it was steering them to the bankrsquos own products which would allow the bank to earn higher fees As part of the settlement the bank agreed to pay a total of $307 million and made certain admissions In addition the Commission granted the institution a conditional waiver that would allow it to continue to act as an investment manager and placement agent for private funds that issue unregistered securities under Rule 506 of Regulation D of the Securities Act of 1933 (Securities Act) and would allow its affiliates to continue to conduct business under Rule 506 but subject to a number of conditions

First the SEC or CFTC can revoke the conditional waiver if the bank fails to comply with either agencyrsquos order or is the subject of any action triggering the disqualification provisions under the federal securities laws for a period of five years

Second the conditional waiver requires the bank to engage a compliance consultant for a five-year period to conduct a comprehensive review of the bankrsquos practices policies and procedures relating to its management and placement of unregistered securities under Rule 506 The compliance consultant must issue an annual report each year summarizing its findings which will be published on the Commissionrsquos website

Third the conditional waiver requires senior executives to assist in addressing identified compliance issues and certify that they have read the compliance consultantrsquos report27

The SECrsquos insistence on such terms suggests that the days of the Commission routinely granting broad unconditional waivers may be coming to an end The commentary by certain Commissioners about conditional waivers also indicates that the SEC will likely make greater use of conditional waivers in the coming months

Securities Enforcement 2015 Year-End Review Page 7

E Update on the SECrsquos Whistleblower Program

Notable whistleblower awards by the Commission in the second half of 2015 included an award on July 17 2015 of $3 million mdash the third-highest award ever under the Whistleblower Program mdash and an award of over $325000 on November 4 2015 28 In announcing the $325000 award the Commission included an admonition for future whistleblowers stating that ldquo[t]he whistleblower waited until after leaving [his employer] to come forward and agency officials say the award could have been higher had this whistleblower not hesitatedrdquo

The Commission announced a joint award of 20 of monetary sanctions to a pair of foreign whistleblowers on September 28 201529 and an award of 28 of sanctions to a separate whistleblower on September 29 201530 The announcements of these awards did not include specific amounts because monetary sanctions have yet to be collected

The SECrsquos Whistleblower Program also received a boost in 2015 from a decision by the Second Circuit regarding eligibility for anti-retaliation protection under Dodd-Frank The decision Berman v NeoOgilvy LLC deferred to the SECrsquos interpretation of ldquowhistleblowerrdquo in Dodd-Frank and held that a whistleblower could sue for retaliation under Dodd-Frank even if the whistleblower was retaliated against for disclosing information to an employer not the Commission31 The Second Circuit decision conflicts with the Fifth Circuitrsquos holding in Asadi v GE Energy that Dodd-Frankrsquos plain language only allowed an employee to sue for retaliation provisions if the employee was retaliated against for disclosing information to the SEC32

Berman could further the SECrsquos policy of encouraging internal reporting which is reflected in among other things Rule 21F-6(a)(4) of the Exchange Act which considers a whistleblowerrsquos participation in an entityrsquos internal reporting system a plus factor in determining the size of an award and Exchange Act Rule 21F-4(b)(7) which creates a 120-day ldquolook-back periodrdquo for whistleblowers who first report wrongdoing through an entityrsquos internal processes33 The look-back period allows a whistleblower to receive credit for reporting information as of the date of the internal report

Whistleblowers claiming to have been fired after reporting wrongdoing internally began bringing suits alleging violations of Dodd-Frankrsquos anti-retaliation provisions within a week of Berman For example on September 17 2015 a former branch manager at an international financial institution filed a whistleblower suit in the SDNY alleging that he had been fired after reporting a number of mortgage loans originated by unregistered loan officers in violation of federal mortgage laws34

Separately as the year came to a close reports emerged of a pending whistleblower award that could be the largest in the programrsquos history As described in Section IID above a large financial institution agreed to a $307 million settlement in December with the SEC and CFTC The actions against the bank reportedly stemmed from a whistleblower tip and based on the settlement amount the whistleblower could receive an award of over $90 million35 Even an award on the low end of the range however could easily surpass $30 million the highest award to date Such staggering awards can only boost the Whistleblower Programrsquos profile which could further increase reporting to the SEC

F Focus on Cybersecurity

In the spring of 2014 OCIE released a risk alert announcing that the SEC would examine registered broker-dealers and investment advisers to assess their cybersecurity preparedness 36 OCIE stated that its examinations would focus on cybersecurity governance identification and assessment of cybersecurity risks protection of networks and information risks associated with remote customer access and funds transfer requests risks associated with vendors and other third parties detection of unauthorized activity and experiences with certain cybersecurity threats OCIE completed its examinations on February 3 2015 and issued a report that criticized companies for failing to prevent cyberattacks notwithstanding written policies designed to prevent such attacks 37 The SECrsquos Division of Investment Management then released guidance for the protection of customer information that emphasized that broker-dealers and investment advisers should limit employee access to data employ encryption technologies and develop incident response plans38

Securities Enforcement 2015 Year-End Review Page 8

While the guidance was welcome it was arguably too general to be particularly useful much like the provisions of Rule 30(a) of Regulation S-P under the Securities Act (the Safeguards Rule) The Safeguards Rule generally requires that regulated entities adopt written policies and procedures that are reasonably designed to safeguard customer records and information However the rule does not define specific requirements for a reasonable cybersecurity program so it is possible that the mere event of a data breach is enough to show that a company lacks reasonably designed procedures Further even a large and sophisticated institution with an advanced cybersecurity policy still faces the risk of a cyberattack mdash and a potential violation of the Safeguards Rule mdash through the smaller less-sophisticated companies with which larger companies interact For example the hackers who stole customer data for 70 million of big-box retailer Targetrsquos customers in 2013 reportedly accessed Targetrsquos systems via the network of the small business responsible for Targetrsquos heating and air conditioning39

The SEC brought one of the first enforcement actions related to OCIErsquos cybersecurity review in the second half of 2015 and that action involved a third-party service provider Specifically on September 22 2015 the SEC instituted a settled AP against RT Jones Capital Equities Management Inc (RT Jones) for allegedly failing to adopt written policies and procedures reasonably designed to protect customer records and information in violation of the Safeguards Rule40 The SEC alleged that RT Jones stored sensitive personally identifiable information for over 100000 clients and other persons on a server hosted by a third-party vendor without adopting written policies and procedures for the security confidentiality or protection of that information The SEC also alleged that a July 22 2013 cyberattack left RT Jonesrsquos customersrsquo data vulnerable to theft Without admitting or denying the SECrsquos allegations RT Jones agreed to pay a $75000 civil monetary penalty Prior to the settlement RT Jones also engaged in remedial efforts by appointing an information security manager to oversee data security and protection and implementing a written information security policy

OCIE has announced that it will conduct a second round of cybersecurity reviews 41 which could lead to more enforcement actions With this additional review and the enforcement actions that are also likely to come calls may grow louder for the SEC to provide more detailed guidance on cybersecurity requirements

G Insider Trading in the Wake of United States v Newman

The Supreme Courtrsquos denial of certiorari in United States v Newman appeared to settle the debate over whether to succeed in an insider trading enforcement action where the SECrsquos only evidence of a personal benefit to the insider is the existence of a personal relationship with the tippee the SEC needed to offer ldquoproof of a meaningfully close personal relationship that generates an exchange that is objective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo42 The debate will continue for at least a few more months however as the Supreme Court recently granted certiorari in United States v Salman a case out of the Ninth Circuit that is likely to address the personal benefit standard set by the Second Circuit in Newman

The SEC may well seek to delay disposition of certain pending insider trading cases until the Supreme Court decides Salman as the SEC has felt the impact of Newman in recent cases On September 14 2015 the SEC suffered a rare defeat in an AP when an ALJ dismissed insider trading claims against Joseph Ruggieri a former trader at Wells Fargo Securities LLC ALJ Jason Patil found that although the SEC showed that Ruggieri traded on material non-public information on numerous occasions the allegations did not meet the SECrsquos burden under Newman to show that the corporate insider gave Ruggieri the information in exchange for a personal benefit ALJ Patil was not persuaded by the SECrsquos argument that Ruggieri received the information in exchange for positive feedback and instead found that it was more likely that Ruggierirsquos feedback was genuine and part of a standard practice as Ruggieri had given the corporate insider positive feedback even before being provided with material non-public information43

Newman may have also had a significant impact on the SECrsquos AP against Steven Cohen the former head of hedge fund SAC Capital Advisors LP (SAC Capital) which settled on January 8 2016 The SEC had alleged that during Cohenrsquos time at the helm of SAC Capital he failed to reasonably supervise high-performing traders Michael Steinberg and Mathew Martoma who had been criminally convicted of insider trading after jury trials The SECrsquos settlement order found that Cohen failed to supervise Martoma (Steinbergrsquos conviction was vacated after Newman for insufficient evidence of a personal benefit) ignored red flags that Martoma was engaged in insider

Securities Enforcement 2015 Year-End Review Page 9

trading and encouraged Martoma to talk to a doctor about nonpublic drug trial results to inform trading decisions

To settle the SECrsquos claims Cohen without admitting or denying wrongdoing agreed to retain an independent consultant to conduct periodic reviews of his family office firms to subject his firms to periodic SEC examinations and to be barred from supervising funds that manage outside money for two years The settlement allows the SEC to extend the time period during which Cohen must comply with these requirements in the event the Commission brings a new action against Cohen and requires any registered broker-dealer or investment advisor that retains Cohen in a supervisory capacity before 2020 to retain an independent consultant until the end of 201944

The SECrsquos AP against Cohen was perhaps the most anticipated AP in recent years and its sudden and surprising settlement which did not include a monetary penalty suggests that the Commission may have had serious concerns about its case in the wake of Newman

The continuing impact of Newman is now an open question in light of the Supreme Courtrsquos grant of certiorari in Salman The question as to which the Supreme Court granted certiorari in Salman is whether the personal benefit to the insider that is necessary to establish insider trading requires proof of an exchange that is ldquoobjective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo as the Second Circuit held in Newman45 The Ninth Circuitrsquos opinion in Salman written by SDNY Judge Jed Rakoff (sitting by designation) can be easily distinguished from Newman on its facts as it did not involve a remote tippee who lacked knowledge of any personal relationship between the insider and immediate tippee and because the personal relationship between tipper and tippee appeared to be far more meaningful than in Newman 46 Nevertheless the Supreme Courtrsquos decision may reach more broadly than the facts of either case to bring some clarity to insider trading law which could be a welcome development by all A decision in Salman is expected by the end of the Supreme Courtrsquos current term in June 2016

H Focus on Compliance Officers

The SECrsquos pursuit of enforcement actions against compliance professionals was one of the most divisive issues of 2015 As we reported in our Mid-Year Review after having typically limited enforcement actions against individuals with compliance authority to those who also had other management responsibilities or in cases of actual fraud the SEC brought claims in the first half of 2015 against individuals responsible solely for compliance and in the context of their compliance roles This sparked public statements of dissent and criticism from Commissioner Gallagher Commissioner Aguilar responded with a statement addressing the criticism and reassuring compliance professionals that the SEC was not interested in bringing enforcement actions against compliance professionals who were obeying the law and fulfilling their responsibilities Chair White added her voice to the debate on July 14 2015 assuring compliance professionals that ldquo[w]e do not bring cases based on second guessing compliance officersrsquo good faith judgments but rather when their actions or inactions cross a clear line that deserve sanctionrdquo47 And on November 4 2015 Enforcement Director Ceresney attempting to assuage the fears of compliance officers who worry they will be targeted reiterated that the overwhelming majority of the cases the SEC brings involve compliance officers who crossed a clear line by engaging in affirmative misconduct or obstructing regulators48

On August 5 2015 in an action illustrative of the types of acts that appear to result in enforcement actions against compliance officers ALJ Cameron Elliot found that Judy Wolf a former investment bank compliance officer aided and abetted her employerrsquos violation of the books and records provisions of the Exchange Act by altering documents during an SEC investigation After learning that the SEC was investigating Wolf admitted to altering her notes regarding a review of securities trades in a fast food chain restaurantrsquos stock that she did not flag for her superiors by including reports of takeover rumors that would have bolstered a conclusion that the trades were improper Although ALJ Elliot found that Wolf violated the Exchange Act he declined to sanction her because among other things he concluded that her violations were isolated and not egregious ALJ Elliot noted that some factors favored sanctions but held that Wolf was a low-level employee and sanctions would allow her employer to label her a ldquobad applerdquo and move on without examining its practices ALJ Elliot further alluded to the

Securities Enforcement 2015 Year-End Review Page 10

ongoing debate over the Commissionrsquos policy of bringing actions against compliance personnel by noting that sanctioning low-hanging fruit like Wolf could discourage competent persons from taking compliance positions49

On August 6 2015 the SEC agreed to settle claims it had brought against an investment advisory firm its CEO John P Bott II and its chief compliance officer Robert Falkenberg50 In March 2011 the SEC asked Falkenberg to provide copies of his 2010 review of the firmrsquos policies and procedures which Falkenberg allegedly told the Commission that he had conducted in February 2011 A review of the firmrsquos metadata however allegedly revealed that Falkenberg had not actually conducted his review until April 2011 and had only spent a few hours drafting his report which he never sent to the firmrsquos CEO The SEC claimed the firm had violated Sections 206(3) 206(4) and 206(4)(A) of the Investment Advisers Act of 1940 (the Advisers Act) and Rules 206(4)-2 206(4)-7 and 206(4)A-1 thereunder and that Bott and Falkenberg had aided and abetted the firmrsquos violations Pursuant to the settlement Bott agreed to pay $450000 in disgorgement to the firmrsquos clients plus prejudgment interest and Bott Falkenberg and the firm were ordered to pay civil monetary penalties in the amounts of $70000 $40000 and $200000 respectively for a total of more than $760000 Falkenberg was also required to complete 30 hours of compliance training for his alleged failure to monitor the firm by conducting an annual review of its policies and procedures

In addition to its recent actions involving compliance officers the SEC has been scrutinizing investment advisersrsquo growing use of outside CCOs For example on November 9 2015 OCIE released a report finding that several outsourced CCOs had not effectively implemented compliance programs for which they were responsible51 In its risk alert OCIE reported that ldquocertain outsourced CCOs could not articulate the business or compliance risksrdquo their firms faced or whether the firms had adopted written policies and procedures to mitigate those risks52 In other instances outside CCOs were not tailoring program templates to the adviserrsquos business meaning that the compliance materials were not applicable to the firm The SEC concluded that advisers with outsourced CCOs should review their business practices to ensure that CCOs have enough authority to implement compliance programs and policies

Even if the SEC follows through with its assurances that only compliance officers who cross a ldquoclear linerdquo will face

enforcement action the number of regulatory lines now drawn for compliance officers mdash and their new focus on outsourced compliance programs mdash makes it clear that this remains an area of heightened enforcement risk

III Selected Judicial Developments Several judicial opinions of significance to the SECrsquos enforcement program were issued in the second half of 2015 and we summarize four of the most significant opinions below First the DC Circuit held that the SEC could not retroactively apply the remedial provisions of Dodd-Frank concerning industry bars to punish conduct that occurred before Dodd-Frank was enacted Second the DC Circuit in a separate case held that Section 4E of the Exchange Act does not set a limitation period for the SEC to bring an enforcement action after issuing a Wells notice Third the Second Circuit issued a long-awaited decision in an appeal of a securities fraud conviction in Litvak that while coming in a criminal case will likely allow the SEC to continue to push the envelope for what constitutes a material misstatement Finally Judge Pauley of the SDNY criticized the SEC for its use of an asset freeze in connection with the collapse of a Cayman Islands bank

A Koch v SEC

On July 14 2015 the DC Circuit ruled in Koch v SEC that the SEC could not use remedial provisions of Dodd-Frank to punish an investment adviser for conduct that occurred before Dodd-Frank was enacted53 The SEC had instituted an AP against Donald Koch and his firm Koch Asset Management (KAM) alleging that Koch engaged in a scheme to manipulate the prices of stocks in which KAM had invested Koch purportedly instructed his broker on two different occasions in 2009 to increase the frequency of the brokerrsquos bids on stocks at the end of the trading day which had the effect of inflating the stocksrsquo prices The SEC alleged that Koch and KAM violated Section 10(b) of the Exchange Act and Section 206(1) of the Investment Company Act and requested among other things that Koch be barred from the securities industry

Prior to Dodd-Frank the SEC had the authority to bar individuals from associating with a subset of securities industry participants including broker-dealers and investment advisers Dodd-Frank however expanded the SECrsquos authority to bar individuals from associating with municipal advisors and ratings organizations a power it did not have prior to the passage of Dodd-Frank

Securities Enforcement 2015 Year-End Review Page 11

Although Kochrsquos alleged market manipulation occurred in 2009 a year before Dodd-Frank the SEC sought to bar Koch from the securities industry pursuant to its authority under Dodd-Frank

The presiding ALJ found that Koch engaged in market manipulation but only imposed a limited industry bar that barred Koch from associating with investment advisers Koch appealed to the Commission which not only affirmed the ALJrsquos findings but also expanded the industry bar imposed on Koch to include municipal advisers and ratings organizations Koch appealed the Commissionrsquos ruling to the DC Circuit which also affirmed that Koch had engaged in market manipulation but reversed the Commissionrsquos expansion of Kochrsquos industry bar The panel held that the SEC could not use Dodd-Frank to penalize Koch for conduct that occurred before the statute was enacted because Dodd-Frank did not expressly allow the SEC to apply its provisions retroactively and expanding Kochrsquos industry bar would ldquowould impair rights [Koch] possessed when he acted increase [Kochrsquos] liability for past conduct or impose new duties with respect to transactions already completedrdquo

A week after the DC Circuit ruled Commissioners Gallagher and Piwowar who had dissented from the SECrsquos order expanding Kochrsquos industry bar said in a joint statement that they were ldquopleasedrdquo with the courtrsquos holding and urged the SEC to address ldquoall impermissibly retroactive collateral bars that have been misapplied since the enactment of Dodd-Frankrdquo54

B Montford v SEC

On July 21 2015 the DC Circuit issued its opinion in Montford v SEC holding that the requirement under Section 4E of the Exchange Act that enforcement proceedings be brought within 180 days of a Wells notice (enacted with Dodd Frank) is not an enforceable jurisdictional requirement 55 Montford arose from an appeal of a final order from the Commission finding that respondents violated Sections 204 206 and 207 of the Advisors Act for among other things allegedly failing to disclose the receipt of fees from an investment manager while disclosing to customers that it was ldquoindependentrdquo and ldquoconflict freerdquo The Commission barred respondents from the securities industry required the disgorgement of $210000 and imposed civil penalties56

Respondents appealed the Commissionrsquos order to the DC Circuit raising two challenges each of which the court rejected First respondents argued that the institution of administrative proceedings more than 180 days after issuing a Wells notice violated Section 4E of the Exchange Act and required dismissal Section 4E of the Exchange Act provides that ldquo[n]ot later than 180 days after the date on which Commission staff provide a written Wells notification to any person the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent not to file an actionrdquo The deadline of Section 4E may be extended by the Director of the Division of Enforcement ldquofor certain complex actionsrdquo which the Commission submitted happened in the instant case 57 Without reaching the issue of whether the Commission properly extended the Section 4E deadline the court found that Section 4E of the Exchange Act was ambiguous as to whether its violation served to bar an action by the Commission Accordingly the court concluded that under Chevron the Commissionrsquos interpretation that Section 4E is not a jurisdictional bar was entitled to deference as long as it was reasonable which the court found it was

Second respondents argued that the Commission abused its discretion in imposing civil penalties and ordering disgorgement because in respondentsrsquo view the receipt of money was not illegal and there was no causal link between the Commissionrsquos order of penalties and disgorgement and the alleged nondisclosure The court rejected this argument too noting that the Commission has flexibility in imposing such penalties which will be upheld as long as they are reasonable

Because the Enforcement Division is generally diligent about ensuring that enforcement actions are filed within 180 days of a Wells notice (or seeking an extension from the Division Director) Montford may have limited practical impact More surprising is arguably the judicial finding of ambiguity in a statute that left little room for interpretation

C SEC v Caledonian Bank

On November 10 2015 in SEC v Caledonian Bank Judge William H Pauley III of the Southern District of New York denied the defendantsrsquo motion to dismiss an SEC complaint that defendants had engaged in unregistered sales of securities in violation of Sections 5(a) and 5(c) of the Securities Act as part of an alleged

Securities Enforcement 2015 Year-End Review Page 12

penny stock ldquopump-and-dumprdquo scheme that the SEC claimed netted them profits of $75 million According to the SEC the defendants allegedly aggressively marketed the stocks of four companies that contained few assets using a series of sham transactions to conceal beneficial ownership of the securities before offering them to the public The opinion on a motion to dismiss would likely be of limited interest if only considered for its holding

In declining to dismiss the pending case however Judge William H Pauley III aggressively criticized the SECrsquos failure to coordinate its enforcement efforts which he stated led to unintended consequences and collateral victims According to the courtrsquos opinion at the same time a team of Washington DC-based SEC attorneys had persuaded Judge Pauley in February 2015 to freeze the assets of a Cayman Islands bank that allegedly sold the fraudulent securities another team of New York-based SEC attorneys who were investigating the some of the same defendants had information showing that the bank had not sold the securities for its own account but merely acted as a broker According to the Judge Pauley the freeze order (which was predicated in part on the belief that the bank had not acted as a broker) had the effect of bankrupting the bank shortly thereafter Judge Pauley blamed the SECrsquos ldquobureaucratic siloingrdquo for causing what he described as an unfortunate and unnecessary outcome In a broader criticism of the SEC Judge Pauley stated ldquoit is hard to believe that those charged with overseeing enforcement are not monitoring activities to avoid needless duplication of effortrdquo and that ldquo[g]iven the high stakes in securities enforcement actions and in the face of a workload the SEC describes as an lsquooverwhelming burdenrsquo a self-examination may be appropriaterdquo It remains to be seen what impact the criticism will have

D United States v Litvak

On December 8 2015 in a highly anticipated ruling the United States Court of Appeals for the Second Circuit reversed bond trader Jesse Litvakrsquos conviction on false statement charges and vacated his conviction on securities fraud charges58 The panel held that the trial court abused its discretion when it excluded critical expert testimony regarding pricing in the bond market which could have bolstered Litvakrsquos arguments that his allegedly false statements were not material The panel only vacated Litvakrsquos securities fraud conviction however rejecting his central argument that the statements at issue were immaterial as a matter of law The SEC had brought a parallel civil action against Litvak arising out of the same

allegations which remains on hold pending the outcome of Litvakrsquos criminal case59

The panelrsquos decision was not a complete win for Litvak and could have broad implications for future SEC actions Litvakrsquos central defense at trial and on appeal was that his alleged misrepresentations which related to the profit he stood to make from counterparties on bond transactions were immaterial as a matter of law Specifically he argued that the statements were immaterial as a matter of law because they related to how much Litvak paid for the securities himself and had no impact on the value of the securities themselves Put another way Litvak argued that counterparties could not have considered his false statements important because they did not pertain to any objective valuation of the underlying securities

The panel rejected Litvakrsquos arguments pointing to testimony from Litvakrsquos counterparties who stated that Litvakrsquos alleged misstatements were ldquoimportantrdquo to them and that the counterparties were injured by those misrepresentations by ultimately paying more than they would otherwise have bid for the securities Even though Litvak had credibly argued that the kind of statements at issue were a common business practice that should have had no relevance to pricing the panel concluded the testimony precluded a finding that no reasonable mind could find Litvakrsquos statements material And although the decision was not written as though it broke new ground the panelrsquos approach to materiality and deference to what investors considered to be important may have a lasting impact on the way the SEC pursues investigations by putting a greater focus on gathering evidence concerning investorsrsquo expectations At the same time the courtrsquos decision that excluding Litvakrsquos proffered materiality expert was an abuse of discretion will ensure that future defendants have more leeway to argue their positions in court

In sum while the district court cannot dismiss the remaining charges against Litvak on materiality grounds Litvak will have much more ammunition to fight these charges at trial And for future defendants (in both criminal and SEC actions) this opinion is a stark reminder that questions of materiality are highly fact-specific and that no misrepresentation should be presumed to be harmless or immune from prosecution

Securities Enforcement 2015 Year-End Review Page 13

IV Selected Significant Investigations and Cases

Below we highlight some of the more notable SEC enforcement actions from the latter half of 2015

A Investment Advisers

The SEC continued its especially vigorous oversight of investment advisers in 2015 It brought enforcement actions focused on representations of investment risk and performance disclosure of conflicts of interest the Custody and Compliance Rules of the Advisers Act and disclosure of fees and expenses while signaling a particularly increased focus on private equity

1 Misrepresentation of Investment Risk and Performance

On July 31 2015 the SEC filed a settled AP against a financial advisory firm and its founder Walter F Grenda Jr The SEC alleged that Grenda made false and misleading statements to the firmrsquos advisory clients in recommending and selling investments in a hedge fund called Prestige Wealth Management Fund LP (Prestige Fund) Grendarsquos statements allegedly misled clients into believing that the investments were less risky than they actually were Grenda also allegedly borrowed $175000 from two of his clients which the SEC claimed he misrepresented would be for business purposes but which he spent on personal expenses and debts In its settlement order the SEC found that the advisory firm and Grenda violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder The SEC also found that the advisory firm and Grenda violated Sections 206(1) and 206(2) of the Advisers Act and that Grenda willfully aided and abetted Prestige Fundrsquos violations of Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder The advisory firm was censured by the Commission and had its registration as an investment adviser revoked but did not pay any financial penalties Without admitting or denying wrongdoing Grenda agreed to pay $7741091 consisting of a $50000 civil monetary penalty and $2241091 in disgorgement and prejudgment interest60

On August 4 2015 the SEC instituted a settled AP against Gold Mountain LLC an investment adviser in Iowa and its founder Gregory Bied for allegedly defrauding investors through false statements in quarterly reports

Allegedly Gold Mountain and Bied made false statements from 2012 through mid-2014 to investors in a hedge fund managed by Gold Mountain namely that the fund was achieving positive quarterly returns when in fact the hedge fund had lost around 75 of its value over that time The SEC claimed that Gold Mountain and Bied violated Sections 9(b) and 206(4) of the Advisers Act Without admitting or denying the SECrsquos findings Gold Mountain and Bied consented to an industry bar and to pay a civil monetary penalty of $200000 which will be distributed to investors61

On November 30 2015 the SEC instituted settled APs against investment adviser Alpha Fiduciary Inc (AFI) Arthur Doglione AFIrsquos majority owner and president and Michael Shea AFIrsquos vice president and business development director The SEC alleged that AFIrsquos executive summaries firm profiles presentations and advertising materials contained certain hypothetical performance information but did not disclose that this data was completely hypothetical Moreover the SEC claimed that while some of AFIrsquos materials contained disclosure language the disclosure language did not appear on the same page as the hypothetical performance data rendering it misleading The SEC also found that although AFIrsquos compliance and procedures manual required the chief compliance officerrsquos prior review and approval of any marketing materials Doglione had exercised sole authority over AFIrsquos policies and procedures Thus the SEC alleged that he was solely responsible for the review and approval of AFIrsquos marketing materials prior to their distribution to clients or prospective clients The SEC also claimed that Shea knew that some of the data was hypothetical yet still included this information in materials he sent to clients Moreover Shea allegedly provided prospective clients with a report of an existing clientrsquos portfolio which represented a 144 return without taking any steps to determine if it was representative of the performance of other AFI clients The SEC claimed that AFI Doglione and Shea violated Sections 206(2) and 206(4) of the Advisers Act As part of the settlement the parties without admitting or denying the Commissionrsquos findings agreed to censures and a total of $550000 in penalties AFI agreed to pay a civil monetary penalty of $250000 to notify existing and prospective clients of the SECrsquos order and to obtain an independent compliance consultant Doglione agreed to a civil monetary penalty of $250000 and Shea agreed to a civil monetary penalty of $2500062

Securities Enforcement 2015 Year-End Review Page 14

2 Conflicts of Interest

On July 24 2015 the SEC instituted a settled AP against investment adviser Dion Money Management LLC (Dion) for allegedly failing to disclose adequately to clients a compensation arrangement whereby Dion received payments from third parties when client assets were invested in certain mutual funds The SEC asserted that although Dion disclosed the conflict of interest it understated the maximum payment rate under the arrangements with third parties and omitted the possibility that investors would receive payments from multiple parties based on the same client assets The SEC found that Dion violated Sections 206(2) and 207 of the Advisers Act Without admitting or denying the SECrsquos findings Dion agreed to amend its disclosures to provide notice to its clients of the SECrsquos order and pay a civil monetary penalty of $50000 63

On August 6 2015 the SEC instituted a settled AP against Tri-Star Advisors (TSA) TSA CEO William T Payne and TSA president Jon C Vaughan for alleged violations of the Advisers Act The SEC alleged that TSA made investment recommendations to its clients and executed trades while charging clients a sales credit ie a percentage mark-up without disclosing the credit to clients Payne and Vaughan allegedly received 55 of the sales credit generated by each trade The SEC claimed that TSA violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and that Payne and Vaughan caused TSA to violate Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the Commissionrsquos findings the respondents agreed to pay $779149 to settle the SECrsquos claims TSA agreed to pay a $150000 civil monetary penalty Payne agreed to pay disgorgement of $142500 prejudgment interest of $323521 and a civil monetary penalty of $19563521 and Vaughan agreed to pay disgorgement of $232500 prejudgment interest of $527850 and a civil monetary penalty of $5000064

On August 10 2015 the SEC instituted a settled AP against an investment management company for allegedly failing to disclose a conflict The SEC claimed that an advisory client made a $50 million loan to a senior executive which the SEC claimed allowed the executive to personally participate in an acquisition led by the management companyrsquos parent Allegedly the management company subsequently invested certain other clientsrsquo funds in two transactions in which the advisory client had invested on different terms The SEC asserted

that the management company thus breached its fiduciary duty by failing to disclose the potential conflict of interest to both sets of clients The SEC also alleged that the management company violated the Advisers Act by inadvertently billing a client approximately $65 million in asset management fees on non-managed assets by inaccurately coding the non-managed assets Finally the SEC alleged that the management company failed to implement certain compliance policies and procedures enforce its code of ethics and maintain required books and records The SEC found that the management company violated Sections 206(2) 206(4) 204(a) and 204A of the Advisers Act and Rules 206(4)-7 204-2(a)(3) 204-2(a)(5) and 204A-1 thereunder The management company agreed to pay a $20 million penalty without admitting or denying the Commissionrsquos findings65

Also on September 29 2015 the SEC filed a complaint in federal court against Lee D Weiss and his investment advisory firm Family Endowment Partners LP (FEP) for allegedly misappropriating investments and concealing conflicts of interest Weiss and FEP allegedly advised their clients to make investments in companies Weiss owned and controlled without telling the clients of their relationship to the companies The SEC claimed that Weiss and FEP then used the investment funds to pay FEPrsquos financial obligations and delinquent interest owed to other clients The SEC further claimed Weiss and FEP advised clients to invest approximately $5 million in a portfolio of consumer loans with a company that offered to pay an annual return of 18 but Weiss structured the investments so his clients received only 9 while he pocketed the remaining 9 The SEC claimed that Weiss and FEP violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Sections 206(1) 206(2) 206(3) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and Section 204(b)(5) of the Advisers Act and Rule 204-1 thereunder The SEC is seeking disgorgement from Weiss FEB and several companies owned by Weiss66 The action is ongoing

On September 30 2015 the SEC settled claims against Focus Media Holding Ltd (Focus) a China-based advertising company and its founder Jason Jiang The SEC alleged Focus and Jiang failed to adequately disclose the partial sale of securities of Focusrsquos wholly owned subsidiary Allyes Online Media Holdings Ltd (Allyes) to certain Allyes and Focus insiders before the securities

Securities Enforcement 2015 Year-End Review Page 15

were sold to a private equity firm Allegedly the securities were sold to the private equity firm at approximately six times the price the insiders had paid for the securities The SEC alleged that the failure to disclose the sales to insiders violated the reporting and antifraud provisions of the federal securities laws Without admitting or denying the SECrsquos allegations Focus agreed to pay a civil monetary penalty of $346 million and Jiang agreed to pay a civil monetary penalty of $969 million disgorgement of $9690000 and prejudgment interest of $164786567

On October 16 2015 the SEC filed a civil injunctive action in federal court in the District of Colorado against Donald J Lester and his private equity firm alleging violations of the federal securities laws The SEC alleged that starting in January 2010 and continuing for five years Lester and his firm sold unregistered securities in two investment funds they managed CFI Fund LLC (CFI) and NuPower LLC (NuPower) raising approximately $10 million The SEC further alleged that the funds acted as unregistered investment companies and neither Lester nor his firm were registered as brokers or associated with registered brokers while trading in securities Additionally Lester purportedly devised a fraudulent scheme to use $28 million of CFI investment funds to meet his firmrsquos repayment obligation to a group of investment funds called Equity Edge that Lesterrsquos firm guaranteed Specifically the SEC alleged that Lesterrsquos firm transferred NuPower to Equity Edge for no consideration after which CFI purchased a 50 interest in NuPower from Equity Edge for $28 million CFIrsquos investors allegedly were not informed about the conflict of interest in the transaction or about the purchase The SEC is seeking among other relief permanent injunctions civil monetary penalties and disgorgement with prejudgment interest68 The action is pending

On June 29 2015 the SEC filed a settled AP against Welhouse amp Associates Inc (WAI) a state-registered investment adviser and its owner principal and CCO Mark Welhouse for an alleged ldquocherry-pickingrdquo scheme which purportedly violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act According to the SEC from February 2010 until January 2013 Welhouse and his firm allocated options trades in an SampP 500 exchange traded fund in a manner that violated his fiduciary duty Specifically the SEC claims that Welhouse disproportionately allocated profitable trades to his

personal and business accounts and allocated unprofitable trades to his advisory clients Welhouse allegedly made this unfair allocation through purchasing options in an omnibus account and delaying allocation of the purchases until after the value of the trades could be determined Without admitting or denying the SECrsquos findings Welhouse and WAI agreed to jointly and severally pay disgorgement of $418141 prejudgment interest of $5091860 and a $300000 civil monetary penalty In addition WAI was censured and Welhouse was barred from the securities industry69

3 Custody and Compliance Rules of the Advisers Act

On August 6 2015 the SEC instituted a settled AP against Reid S Johnson founder sole owner president and managing director of The Planning Group of Scottsdale LLC (TPGS) an Arizona-based investment adviser for allegedly aiding and abetting violations of Rules 206(4)-2 (the Custody Rule) and 206(4)-7 (the Compliance Rule) under the Advisers Act The Custody Rule imposes detailed requirements governing the manner in which a SEC-registered investment adviser must hold client assets and related obligations The Compliance Rule requires registered investment advisers to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act by the adviser and any of its supervised persons

The SEC alleged that TPGS violated the Custody Rule by failing to accurately determine the securities over which it had custody and by failing to ensure that the securities were maintained by a qualified custodian The SEC also charged that TPGS violated the Compliance Rule by failing to maintain an adequate compliance manual because TPGSrsquos compliance manual did not address the 2009 amendments to the custody rule Finally the SEC charged that TPGS and Johnson willfully made materially false representations in TPGSrsquos Forms ADV from 2010 through 201270 The action is ongoing

On August 6 2015 the SEC instituted a settled AP against a Texas-based investment advisory firm its sole owner and manager John P Bott and its former Chief Compliance Officer F Robert Falkenberg for allegedly violating the principal transaction prohibitions and Custody and Compliance Rules under the Advisers Act The SEC claimed that the investment advisory firm failed to provide any prior written disclosure or obtain consent from clients for at least 2000 securities transactions and

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 6

Commission to routinely grant blanket waivers especially to large financial institutions

On December 18 2015 the SEC granted such a conditional waiver when it and the Commodity Futures Trading Commission (CFTC) settled with a large financial institution that had allegedly failed to tell clients that it was steering them to the bankrsquos own products which would allow the bank to earn higher fees As part of the settlement the bank agreed to pay a total of $307 million and made certain admissions In addition the Commission granted the institution a conditional waiver that would allow it to continue to act as an investment manager and placement agent for private funds that issue unregistered securities under Rule 506 of Regulation D of the Securities Act of 1933 (Securities Act) and would allow its affiliates to continue to conduct business under Rule 506 but subject to a number of conditions

First the SEC or CFTC can revoke the conditional waiver if the bank fails to comply with either agencyrsquos order or is the subject of any action triggering the disqualification provisions under the federal securities laws for a period of five years

Second the conditional waiver requires the bank to engage a compliance consultant for a five-year period to conduct a comprehensive review of the bankrsquos practices policies and procedures relating to its management and placement of unregistered securities under Rule 506 The compliance consultant must issue an annual report each year summarizing its findings which will be published on the Commissionrsquos website

Third the conditional waiver requires senior executives to assist in addressing identified compliance issues and certify that they have read the compliance consultantrsquos report27

The SECrsquos insistence on such terms suggests that the days of the Commission routinely granting broad unconditional waivers may be coming to an end The commentary by certain Commissioners about conditional waivers also indicates that the SEC will likely make greater use of conditional waivers in the coming months

Securities Enforcement 2015 Year-End Review Page 7

E Update on the SECrsquos Whistleblower Program

Notable whistleblower awards by the Commission in the second half of 2015 included an award on July 17 2015 of $3 million mdash the third-highest award ever under the Whistleblower Program mdash and an award of over $325000 on November 4 2015 28 In announcing the $325000 award the Commission included an admonition for future whistleblowers stating that ldquo[t]he whistleblower waited until after leaving [his employer] to come forward and agency officials say the award could have been higher had this whistleblower not hesitatedrdquo

The Commission announced a joint award of 20 of monetary sanctions to a pair of foreign whistleblowers on September 28 201529 and an award of 28 of sanctions to a separate whistleblower on September 29 201530 The announcements of these awards did not include specific amounts because monetary sanctions have yet to be collected

The SECrsquos Whistleblower Program also received a boost in 2015 from a decision by the Second Circuit regarding eligibility for anti-retaliation protection under Dodd-Frank The decision Berman v NeoOgilvy LLC deferred to the SECrsquos interpretation of ldquowhistleblowerrdquo in Dodd-Frank and held that a whistleblower could sue for retaliation under Dodd-Frank even if the whistleblower was retaliated against for disclosing information to an employer not the Commission31 The Second Circuit decision conflicts with the Fifth Circuitrsquos holding in Asadi v GE Energy that Dodd-Frankrsquos plain language only allowed an employee to sue for retaliation provisions if the employee was retaliated against for disclosing information to the SEC32

Berman could further the SECrsquos policy of encouraging internal reporting which is reflected in among other things Rule 21F-6(a)(4) of the Exchange Act which considers a whistleblowerrsquos participation in an entityrsquos internal reporting system a plus factor in determining the size of an award and Exchange Act Rule 21F-4(b)(7) which creates a 120-day ldquolook-back periodrdquo for whistleblowers who first report wrongdoing through an entityrsquos internal processes33 The look-back period allows a whistleblower to receive credit for reporting information as of the date of the internal report

Whistleblowers claiming to have been fired after reporting wrongdoing internally began bringing suits alleging violations of Dodd-Frankrsquos anti-retaliation provisions within a week of Berman For example on September 17 2015 a former branch manager at an international financial institution filed a whistleblower suit in the SDNY alleging that he had been fired after reporting a number of mortgage loans originated by unregistered loan officers in violation of federal mortgage laws34

Separately as the year came to a close reports emerged of a pending whistleblower award that could be the largest in the programrsquos history As described in Section IID above a large financial institution agreed to a $307 million settlement in December with the SEC and CFTC The actions against the bank reportedly stemmed from a whistleblower tip and based on the settlement amount the whistleblower could receive an award of over $90 million35 Even an award on the low end of the range however could easily surpass $30 million the highest award to date Such staggering awards can only boost the Whistleblower Programrsquos profile which could further increase reporting to the SEC

F Focus on Cybersecurity

In the spring of 2014 OCIE released a risk alert announcing that the SEC would examine registered broker-dealers and investment advisers to assess their cybersecurity preparedness 36 OCIE stated that its examinations would focus on cybersecurity governance identification and assessment of cybersecurity risks protection of networks and information risks associated with remote customer access and funds transfer requests risks associated with vendors and other third parties detection of unauthorized activity and experiences with certain cybersecurity threats OCIE completed its examinations on February 3 2015 and issued a report that criticized companies for failing to prevent cyberattacks notwithstanding written policies designed to prevent such attacks 37 The SECrsquos Division of Investment Management then released guidance for the protection of customer information that emphasized that broker-dealers and investment advisers should limit employee access to data employ encryption technologies and develop incident response plans38

Securities Enforcement 2015 Year-End Review Page 8

While the guidance was welcome it was arguably too general to be particularly useful much like the provisions of Rule 30(a) of Regulation S-P under the Securities Act (the Safeguards Rule) The Safeguards Rule generally requires that regulated entities adopt written policies and procedures that are reasonably designed to safeguard customer records and information However the rule does not define specific requirements for a reasonable cybersecurity program so it is possible that the mere event of a data breach is enough to show that a company lacks reasonably designed procedures Further even a large and sophisticated institution with an advanced cybersecurity policy still faces the risk of a cyberattack mdash and a potential violation of the Safeguards Rule mdash through the smaller less-sophisticated companies with which larger companies interact For example the hackers who stole customer data for 70 million of big-box retailer Targetrsquos customers in 2013 reportedly accessed Targetrsquos systems via the network of the small business responsible for Targetrsquos heating and air conditioning39

The SEC brought one of the first enforcement actions related to OCIErsquos cybersecurity review in the second half of 2015 and that action involved a third-party service provider Specifically on September 22 2015 the SEC instituted a settled AP against RT Jones Capital Equities Management Inc (RT Jones) for allegedly failing to adopt written policies and procedures reasonably designed to protect customer records and information in violation of the Safeguards Rule40 The SEC alleged that RT Jones stored sensitive personally identifiable information for over 100000 clients and other persons on a server hosted by a third-party vendor without adopting written policies and procedures for the security confidentiality or protection of that information The SEC also alleged that a July 22 2013 cyberattack left RT Jonesrsquos customersrsquo data vulnerable to theft Without admitting or denying the SECrsquos allegations RT Jones agreed to pay a $75000 civil monetary penalty Prior to the settlement RT Jones also engaged in remedial efforts by appointing an information security manager to oversee data security and protection and implementing a written information security policy

OCIE has announced that it will conduct a second round of cybersecurity reviews 41 which could lead to more enforcement actions With this additional review and the enforcement actions that are also likely to come calls may grow louder for the SEC to provide more detailed guidance on cybersecurity requirements

G Insider Trading in the Wake of United States v Newman

The Supreme Courtrsquos denial of certiorari in United States v Newman appeared to settle the debate over whether to succeed in an insider trading enforcement action where the SECrsquos only evidence of a personal benefit to the insider is the existence of a personal relationship with the tippee the SEC needed to offer ldquoproof of a meaningfully close personal relationship that generates an exchange that is objective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo42 The debate will continue for at least a few more months however as the Supreme Court recently granted certiorari in United States v Salman a case out of the Ninth Circuit that is likely to address the personal benefit standard set by the Second Circuit in Newman

The SEC may well seek to delay disposition of certain pending insider trading cases until the Supreme Court decides Salman as the SEC has felt the impact of Newman in recent cases On September 14 2015 the SEC suffered a rare defeat in an AP when an ALJ dismissed insider trading claims against Joseph Ruggieri a former trader at Wells Fargo Securities LLC ALJ Jason Patil found that although the SEC showed that Ruggieri traded on material non-public information on numerous occasions the allegations did not meet the SECrsquos burden under Newman to show that the corporate insider gave Ruggieri the information in exchange for a personal benefit ALJ Patil was not persuaded by the SECrsquos argument that Ruggieri received the information in exchange for positive feedback and instead found that it was more likely that Ruggierirsquos feedback was genuine and part of a standard practice as Ruggieri had given the corporate insider positive feedback even before being provided with material non-public information43

Newman may have also had a significant impact on the SECrsquos AP against Steven Cohen the former head of hedge fund SAC Capital Advisors LP (SAC Capital) which settled on January 8 2016 The SEC had alleged that during Cohenrsquos time at the helm of SAC Capital he failed to reasonably supervise high-performing traders Michael Steinberg and Mathew Martoma who had been criminally convicted of insider trading after jury trials The SECrsquos settlement order found that Cohen failed to supervise Martoma (Steinbergrsquos conviction was vacated after Newman for insufficient evidence of a personal benefit) ignored red flags that Martoma was engaged in insider

Securities Enforcement 2015 Year-End Review Page 9

trading and encouraged Martoma to talk to a doctor about nonpublic drug trial results to inform trading decisions

To settle the SECrsquos claims Cohen without admitting or denying wrongdoing agreed to retain an independent consultant to conduct periodic reviews of his family office firms to subject his firms to periodic SEC examinations and to be barred from supervising funds that manage outside money for two years The settlement allows the SEC to extend the time period during which Cohen must comply with these requirements in the event the Commission brings a new action against Cohen and requires any registered broker-dealer or investment advisor that retains Cohen in a supervisory capacity before 2020 to retain an independent consultant until the end of 201944

The SECrsquos AP against Cohen was perhaps the most anticipated AP in recent years and its sudden and surprising settlement which did not include a monetary penalty suggests that the Commission may have had serious concerns about its case in the wake of Newman

The continuing impact of Newman is now an open question in light of the Supreme Courtrsquos grant of certiorari in Salman The question as to which the Supreme Court granted certiorari in Salman is whether the personal benefit to the insider that is necessary to establish insider trading requires proof of an exchange that is ldquoobjective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo as the Second Circuit held in Newman45 The Ninth Circuitrsquos opinion in Salman written by SDNY Judge Jed Rakoff (sitting by designation) can be easily distinguished from Newman on its facts as it did not involve a remote tippee who lacked knowledge of any personal relationship between the insider and immediate tippee and because the personal relationship between tipper and tippee appeared to be far more meaningful than in Newman 46 Nevertheless the Supreme Courtrsquos decision may reach more broadly than the facts of either case to bring some clarity to insider trading law which could be a welcome development by all A decision in Salman is expected by the end of the Supreme Courtrsquos current term in June 2016

H Focus on Compliance Officers

The SECrsquos pursuit of enforcement actions against compliance professionals was one of the most divisive issues of 2015 As we reported in our Mid-Year Review after having typically limited enforcement actions against individuals with compliance authority to those who also had other management responsibilities or in cases of actual fraud the SEC brought claims in the first half of 2015 against individuals responsible solely for compliance and in the context of their compliance roles This sparked public statements of dissent and criticism from Commissioner Gallagher Commissioner Aguilar responded with a statement addressing the criticism and reassuring compliance professionals that the SEC was not interested in bringing enforcement actions against compliance professionals who were obeying the law and fulfilling their responsibilities Chair White added her voice to the debate on July 14 2015 assuring compliance professionals that ldquo[w]e do not bring cases based on second guessing compliance officersrsquo good faith judgments but rather when their actions or inactions cross a clear line that deserve sanctionrdquo47 And on November 4 2015 Enforcement Director Ceresney attempting to assuage the fears of compliance officers who worry they will be targeted reiterated that the overwhelming majority of the cases the SEC brings involve compliance officers who crossed a clear line by engaging in affirmative misconduct or obstructing regulators48

On August 5 2015 in an action illustrative of the types of acts that appear to result in enforcement actions against compliance officers ALJ Cameron Elliot found that Judy Wolf a former investment bank compliance officer aided and abetted her employerrsquos violation of the books and records provisions of the Exchange Act by altering documents during an SEC investigation After learning that the SEC was investigating Wolf admitted to altering her notes regarding a review of securities trades in a fast food chain restaurantrsquos stock that she did not flag for her superiors by including reports of takeover rumors that would have bolstered a conclusion that the trades were improper Although ALJ Elliot found that Wolf violated the Exchange Act he declined to sanction her because among other things he concluded that her violations were isolated and not egregious ALJ Elliot noted that some factors favored sanctions but held that Wolf was a low-level employee and sanctions would allow her employer to label her a ldquobad applerdquo and move on without examining its practices ALJ Elliot further alluded to the

Securities Enforcement 2015 Year-End Review Page 10

ongoing debate over the Commissionrsquos policy of bringing actions against compliance personnel by noting that sanctioning low-hanging fruit like Wolf could discourage competent persons from taking compliance positions49

On August 6 2015 the SEC agreed to settle claims it had brought against an investment advisory firm its CEO John P Bott II and its chief compliance officer Robert Falkenberg50 In March 2011 the SEC asked Falkenberg to provide copies of his 2010 review of the firmrsquos policies and procedures which Falkenberg allegedly told the Commission that he had conducted in February 2011 A review of the firmrsquos metadata however allegedly revealed that Falkenberg had not actually conducted his review until April 2011 and had only spent a few hours drafting his report which he never sent to the firmrsquos CEO The SEC claimed the firm had violated Sections 206(3) 206(4) and 206(4)(A) of the Investment Advisers Act of 1940 (the Advisers Act) and Rules 206(4)-2 206(4)-7 and 206(4)A-1 thereunder and that Bott and Falkenberg had aided and abetted the firmrsquos violations Pursuant to the settlement Bott agreed to pay $450000 in disgorgement to the firmrsquos clients plus prejudgment interest and Bott Falkenberg and the firm were ordered to pay civil monetary penalties in the amounts of $70000 $40000 and $200000 respectively for a total of more than $760000 Falkenberg was also required to complete 30 hours of compliance training for his alleged failure to monitor the firm by conducting an annual review of its policies and procedures

In addition to its recent actions involving compliance officers the SEC has been scrutinizing investment advisersrsquo growing use of outside CCOs For example on November 9 2015 OCIE released a report finding that several outsourced CCOs had not effectively implemented compliance programs for which they were responsible51 In its risk alert OCIE reported that ldquocertain outsourced CCOs could not articulate the business or compliance risksrdquo their firms faced or whether the firms had adopted written policies and procedures to mitigate those risks52 In other instances outside CCOs were not tailoring program templates to the adviserrsquos business meaning that the compliance materials were not applicable to the firm The SEC concluded that advisers with outsourced CCOs should review their business practices to ensure that CCOs have enough authority to implement compliance programs and policies

Even if the SEC follows through with its assurances that only compliance officers who cross a ldquoclear linerdquo will face

enforcement action the number of regulatory lines now drawn for compliance officers mdash and their new focus on outsourced compliance programs mdash makes it clear that this remains an area of heightened enforcement risk

III Selected Judicial Developments Several judicial opinions of significance to the SECrsquos enforcement program were issued in the second half of 2015 and we summarize four of the most significant opinions below First the DC Circuit held that the SEC could not retroactively apply the remedial provisions of Dodd-Frank concerning industry bars to punish conduct that occurred before Dodd-Frank was enacted Second the DC Circuit in a separate case held that Section 4E of the Exchange Act does not set a limitation period for the SEC to bring an enforcement action after issuing a Wells notice Third the Second Circuit issued a long-awaited decision in an appeal of a securities fraud conviction in Litvak that while coming in a criminal case will likely allow the SEC to continue to push the envelope for what constitutes a material misstatement Finally Judge Pauley of the SDNY criticized the SEC for its use of an asset freeze in connection with the collapse of a Cayman Islands bank

A Koch v SEC

On July 14 2015 the DC Circuit ruled in Koch v SEC that the SEC could not use remedial provisions of Dodd-Frank to punish an investment adviser for conduct that occurred before Dodd-Frank was enacted53 The SEC had instituted an AP against Donald Koch and his firm Koch Asset Management (KAM) alleging that Koch engaged in a scheme to manipulate the prices of stocks in which KAM had invested Koch purportedly instructed his broker on two different occasions in 2009 to increase the frequency of the brokerrsquos bids on stocks at the end of the trading day which had the effect of inflating the stocksrsquo prices The SEC alleged that Koch and KAM violated Section 10(b) of the Exchange Act and Section 206(1) of the Investment Company Act and requested among other things that Koch be barred from the securities industry

Prior to Dodd-Frank the SEC had the authority to bar individuals from associating with a subset of securities industry participants including broker-dealers and investment advisers Dodd-Frank however expanded the SECrsquos authority to bar individuals from associating with municipal advisors and ratings organizations a power it did not have prior to the passage of Dodd-Frank

Securities Enforcement 2015 Year-End Review Page 11

Although Kochrsquos alleged market manipulation occurred in 2009 a year before Dodd-Frank the SEC sought to bar Koch from the securities industry pursuant to its authority under Dodd-Frank

The presiding ALJ found that Koch engaged in market manipulation but only imposed a limited industry bar that barred Koch from associating with investment advisers Koch appealed to the Commission which not only affirmed the ALJrsquos findings but also expanded the industry bar imposed on Koch to include municipal advisers and ratings organizations Koch appealed the Commissionrsquos ruling to the DC Circuit which also affirmed that Koch had engaged in market manipulation but reversed the Commissionrsquos expansion of Kochrsquos industry bar The panel held that the SEC could not use Dodd-Frank to penalize Koch for conduct that occurred before the statute was enacted because Dodd-Frank did not expressly allow the SEC to apply its provisions retroactively and expanding Kochrsquos industry bar would ldquowould impair rights [Koch] possessed when he acted increase [Kochrsquos] liability for past conduct or impose new duties with respect to transactions already completedrdquo

A week after the DC Circuit ruled Commissioners Gallagher and Piwowar who had dissented from the SECrsquos order expanding Kochrsquos industry bar said in a joint statement that they were ldquopleasedrdquo with the courtrsquos holding and urged the SEC to address ldquoall impermissibly retroactive collateral bars that have been misapplied since the enactment of Dodd-Frankrdquo54

B Montford v SEC

On July 21 2015 the DC Circuit issued its opinion in Montford v SEC holding that the requirement under Section 4E of the Exchange Act that enforcement proceedings be brought within 180 days of a Wells notice (enacted with Dodd Frank) is not an enforceable jurisdictional requirement 55 Montford arose from an appeal of a final order from the Commission finding that respondents violated Sections 204 206 and 207 of the Advisors Act for among other things allegedly failing to disclose the receipt of fees from an investment manager while disclosing to customers that it was ldquoindependentrdquo and ldquoconflict freerdquo The Commission barred respondents from the securities industry required the disgorgement of $210000 and imposed civil penalties56

Respondents appealed the Commissionrsquos order to the DC Circuit raising two challenges each of which the court rejected First respondents argued that the institution of administrative proceedings more than 180 days after issuing a Wells notice violated Section 4E of the Exchange Act and required dismissal Section 4E of the Exchange Act provides that ldquo[n]ot later than 180 days after the date on which Commission staff provide a written Wells notification to any person the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent not to file an actionrdquo The deadline of Section 4E may be extended by the Director of the Division of Enforcement ldquofor certain complex actionsrdquo which the Commission submitted happened in the instant case 57 Without reaching the issue of whether the Commission properly extended the Section 4E deadline the court found that Section 4E of the Exchange Act was ambiguous as to whether its violation served to bar an action by the Commission Accordingly the court concluded that under Chevron the Commissionrsquos interpretation that Section 4E is not a jurisdictional bar was entitled to deference as long as it was reasonable which the court found it was

Second respondents argued that the Commission abused its discretion in imposing civil penalties and ordering disgorgement because in respondentsrsquo view the receipt of money was not illegal and there was no causal link between the Commissionrsquos order of penalties and disgorgement and the alleged nondisclosure The court rejected this argument too noting that the Commission has flexibility in imposing such penalties which will be upheld as long as they are reasonable

Because the Enforcement Division is generally diligent about ensuring that enforcement actions are filed within 180 days of a Wells notice (or seeking an extension from the Division Director) Montford may have limited practical impact More surprising is arguably the judicial finding of ambiguity in a statute that left little room for interpretation

C SEC v Caledonian Bank

On November 10 2015 in SEC v Caledonian Bank Judge William H Pauley III of the Southern District of New York denied the defendantsrsquo motion to dismiss an SEC complaint that defendants had engaged in unregistered sales of securities in violation of Sections 5(a) and 5(c) of the Securities Act as part of an alleged

Securities Enforcement 2015 Year-End Review Page 12

penny stock ldquopump-and-dumprdquo scheme that the SEC claimed netted them profits of $75 million According to the SEC the defendants allegedly aggressively marketed the stocks of four companies that contained few assets using a series of sham transactions to conceal beneficial ownership of the securities before offering them to the public The opinion on a motion to dismiss would likely be of limited interest if only considered for its holding

In declining to dismiss the pending case however Judge William H Pauley III aggressively criticized the SECrsquos failure to coordinate its enforcement efforts which he stated led to unintended consequences and collateral victims According to the courtrsquos opinion at the same time a team of Washington DC-based SEC attorneys had persuaded Judge Pauley in February 2015 to freeze the assets of a Cayman Islands bank that allegedly sold the fraudulent securities another team of New York-based SEC attorneys who were investigating the some of the same defendants had information showing that the bank had not sold the securities for its own account but merely acted as a broker According to the Judge Pauley the freeze order (which was predicated in part on the belief that the bank had not acted as a broker) had the effect of bankrupting the bank shortly thereafter Judge Pauley blamed the SECrsquos ldquobureaucratic siloingrdquo for causing what he described as an unfortunate and unnecessary outcome In a broader criticism of the SEC Judge Pauley stated ldquoit is hard to believe that those charged with overseeing enforcement are not monitoring activities to avoid needless duplication of effortrdquo and that ldquo[g]iven the high stakes in securities enforcement actions and in the face of a workload the SEC describes as an lsquooverwhelming burdenrsquo a self-examination may be appropriaterdquo It remains to be seen what impact the criticism will have

D United States v Litvak

On December 8 2015 in a highly anticipated ruling the United States Court of Appeals for the Second Circuit reversed bond trader Jesse Litvakrsquos conviction on false statement charges and vacated his conviction on securities fraud charges58 The panel held that the trial court abused its discretion when it excluded critical expert testimony regarding pricing in the bond market which could have bolstered Litvakrsquos arguments that his allegedly false statements were not material The panel only vacated Litvakrsquos securities fraud conviction however rejecting his central argument that the statements at issue were immaterial as a matter of law The SEC had brought a parallel civil action against Litvak arising out of the same

allegations which remains on hold pending the outcome of Litvakrsquos criminal case59

The panelrsquos decision was not a complete win for Litvak and could have broad implications for future SEC actions Litvakrsquos central defense at trial and on appeal was that his alleged misrepresentations which related to the profit he stood to make from counterparties on bond transactions were immaterial as a matter of law Specifically he argued that the statements were immaterial as a matter of law because they related to how much Litvak paid for the securities himself and had no impact on the value of the securities themselves Put another way Litvak argued that counterparties could not have considered his false statements important because they did not pertain to any objective valuation of the underlying securities

The panel rejected Litvakrsquos arguments pointing to testimony from Litvakrsquos counterparties who stated that Litvakrsquos alleged misstatements were ldquoimportantrdquo to them and that the counterparties were injured by those misrepresentations by ultimately paying more than they would otherwise have bid for the securities Even though Litvak had credibly argued that the kind of statements at issue were a common business practice that should have had no relevance to pricing the panel concluded the testimony precluded a finding that no reasonable mind could find Litvakrsquos statements material And although the decision was not written as though it broke new ground the panelrsquos approach to materiality and deference to what investors considered to be important may have a lasting impact on the way the SEC pursues investigations by putting a greater focus on gathering evidence concerning investorsrsquo expectations At the same time the courtrsquos decision that excluding Litvakrsquos proffered materiality expert was an abuse of discretion will ensure that future defendants have more leeway to argue their positions in court

In sum while the district court cannot dismiss the remaining charges against Litvak on materiality grounds Litvak will have much more ammunition to fight these charges at trial And for future defendants (in both criminal and SEC actions) this opinion is a stark reminder that questions of materiality are highly fact-specific and that no misrepresentation should be presumed to be harmless or immune from prosecution

Securities Enforcement 2015 Year-End Review Page 13

IV Selected Significant Investigations and Cases

Below we highlight some of the more notable SEC enforcement actions from the latter half of 2015

A Investment Advisers

The SEC continued its especially vigorous oversight of investment advisers in 2015 It brought enforcement actions focused on representations of investment risk and performance disclosure of conflicts of interest the Custody and Compliance Rules of the Advisers Act and disclosure of fees and expenses while signaling a particularly increased focus on private equity

1 Misrepresentation of Investment Risk and Performance

On July 31 2015 the SEC filed a settled AP against a financial advisory firm and its founder Walter F Grenda Jr The SEC alleged that Grenda made false and misleading statements to the firmrsquos advisory clients in recommending and selling investments in a hedge fund called Prestige Wealth Management Fund LP (Prestige Fund) Grendarsquos statements allegedly misled clients into believing that the investments were less risky than they actually were Grenda also allegedly borrowed $175000 from two of his clients which the SEC claimed he misrepresented would be for business purposes but which he spent on personal expenses and debts In its settlement order the SEC found that the advisory firm and Grenda violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder The SEC also found that the advisory firm and Grenda violated Sections 206(1) and 206(2) of the Advisers Act and that Grenda willfully aided and abetted Prestige Fundrsquos violations of Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder The advisory firm was censured by the Commission and had its registration as an investment adviser revoked but did not pay any financial penalties Without admitting or denying wrongdoing Grenda agreed to pay $7741091 consisting of a $50000 civil monetary penalty and $2241091 in disgorgement and prejudgment interest60

On August 4 2015 the SEC instituted a settled AP against Gold Mountain LLC an investment adviser in Iowa and its founder Gregory Bied for allegedly defrauding investors through false statements in quarterly reports

Allegedly Gold Mountain and Bied made false statements from 2012 through mid-2014 to investors in a hedge fund managed by Gold Mountain namely that the fund was achieving positive quarterly returns when in fact the hedge fund had lost around 75 of its value over that time The SEC claimed that Gold Mountain and Bied violated Sections 9(b) and 206(4) of the Advisers Act Without admitting or denying the SECrsquos findings Gold Mountain and Bied consented to an industry bar and to pay a civil monetary penalty of $200000 which will be distributed to investors61

On November 30 2015 the SEC instituted settled APs against investment adviser Alpha Fiduciary Inc (AFI) Arthur Doglione AFIrsquos majority owner and president and Michael Shea AFIrsquos vice president and business development director The SEC alleged that AFIrsquos executive summaries firm profiles presentations and advertising materials contained certain hypothetical performance information but did not disclose that this data was completely hypothetical Moreover the SEC claimed that while some of AFIrsquos materials contained disclosure language the disclosure language did not appear on the same page as the hypothetical performance data rendering it misleading The SEC also found that although AFIrsquos compliance and procedures manual required the chief compliance officerrsquos prior review and approval of any marketing materials Doglione had exercised sole authority over AFIrsquos policies and procedures Thus the SEC alleged that he was solely responsible for the review and approval of AFIrsquos marketing materials prior to their distribution to clients or prospective clients The SEC also claimed that Shea knew that some of the data was hypothetical yet still included this information in materials he sent to clients Moreover Shea allegedly provided prospective clients with a report of an existing clientrsquos portfolio which represented a 144 return without taking any steps to determine if it was representative of the performance of other AFI clients The SEC claimed that AFI Doglione and Shea violated Sections 206(2) and 206(4) of the Advisers Act As part of the settlement the parties without admitting or denying the Commissionrsquos findings agreed to censures and a total of $550000 in penalties AFI agreed to pay a civil monetary penalty of $250000 to notify existing and prospective clients of the SECrsquos order and to obtain an independent compliance consultant Doglione agreed to a civil monetary penalty of $250000 and Shea agreed to a civil monetary penalty of $2500062

Securities Enforcement 2015 Year-End Review Page 14

2 Conflicts of Interest

On July 24 2015 the SEC instituted a settled AP against investment adviser Dion Money Management LLC (Dion) for allegedly failing to disclose adequately to clients a compensation arrangement whereby Dion received payments from third parties when client assets were invested in certain mutual funds The SEC asserted that although Dion disclosed the conflict of interest it understated the maximum payment rate under the arrangements with third parties and omitted the possibility that investors would receive payments from multiple parties based on the same client assets The SEC found that Dion violated Sections 206(2) and 207 of the Advisers Act Without admitting or denying the SECrsquos findings Dion agreed to amend its disclosures to provide notice to its clients of the SECrsquos order and pay a civil monetary penalty of $50000 63

On August 6 2015 the SEC instituted a settled AP against Tri-Star Advisors (TSA) TSA CEO William T Payne and TSA president Jon C Vaughan for alleged violations of the Advisers Act The SEC alleged that TSA made investment recommendations to its clients and executed trades while charging clients a sales credit ie a percentage mark-up without disclosing the credit to clients Payne and Vaughan allegedly received 55 of the sales credit generated by each trade The SEC claimed that TSA violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and that Payne and Vaughan caused TSA to violate Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the Commissionrsquos findings the respondents agreed to pay $779149 to settle the SECrsquos claims TSA agreed to pay a $150000 civil monetary penalty Payne agreed to pay disgorgement of $142500 prejudgment interest of $323521 and a civil monetary penalty of $19563521 and Vaughan agreed to pay disgorgement of $232500 prejudgment interest of $527850 and a civil monetary penalty of $5000064

On August 10 2015 the SEC instituted a settled AP against an investment management company for allegedly failing to disclose a conflict The SEC claimed that an advisory client made a $50 million loan to a senior executive which the SEC claimed allowed the executive to personally participate in an acquisition led by the management companyrsquos parent Allegedly the management company subsequently invested certain other clientsrsquo funds in two transactions in which the advisory client had invested on different terms The SEC asserted

that the management company thus breached its fiduciary duty by failing to disclose the potential conflict of interest to both sets of clients The SEC also alleged that the management company violated the Advisers Act by inadvertently billing a client approximately $65 million in asset management fees on non-managed assets by inaccurately coding the non-managed assets Finally the SEC alleged that the management company failed to implement certain compliance policies and procedures enforce its code of ethics and maintain required books and records The SEC found that the management company violated Sections 206(2) 206(4) 204(a) and 204A of the Advisers Act and Rules 206(4)-7 204-2(a)(3) 204-2(a)(5) and 204A-1 thereunder The management company agreed to pay a $20 million penalty without admitting or denying the Commissionrsquos findings65

Also on September 29 2015 the SEC filed a complaint in federal court against Lee D Weiss and his investment advisory firm Family Endowment Partners LP (FEP) for allegedly misappropriating investments and concealing conflicts of interest Weiss and FEP allegedly advised their clients to make investments in companies Weiss owned and controlled without telling the clients of their relationship to the companies The SEC claimed that Weiss and FEP then used the investment funds to pay FEPrsquos financial obligations and delinquent interest owed to other clients The SEC further claimed Weiss and FEP advised clients to invest approximately $5 million in a portfolio of consumer loans with a company that offered to pay an annual return of 18 but Weiss structured the investments so his clients received only 9 while he pocketed the remaining 9 The SEC claimed that Weiss and FEP violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Sections 206(1) 206(2) 206(3) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and Section 204(b)(5) of the Advisers Act and Rule 204-1 thereunder The SEC is seeking disgorgement from Weiss FEB and several companies owned by Weiss66 The action is ongoing

On September 30 2015 the SEC settled claims against Focus Media Holding Ltd (Focus) a China-based advertising company and its founder Jason Jiang The SEC alleged Focus and Jiang failed to adequately disclose the partial sale of securities of Focusrsquos wholly owned subsidiary Allyes Online Media Holdings Ltd (Allyes) to certain Allyes and Focus insiders before the securities

Securities Enforcement 2015 Year-End Review Page 15

were sold to a private equity firm Allegedly the securities were sold to the private equity firm at approximately six times the price the insiders had paid for the securities The SEC alleged that the failure to disclose the sales to insiders violated the reporting and antifraud provisions of the federal securities laws Without admitting or denying the SECrsquos allegations Focus agreed to pay a civil monetary penalty of $346 million and Jiang agreed to pay a civil monetary penalty of $969 million disgorgement of $9690000 and prejudgment interest of $164786567

On October 16 2015 the SEC filed a civil injunctive action in federal court in the District of Colorado against Donald J Lester and his private equity firm alleging violations of the federal securities laws The SEC alleged that starting in January 2010 and continuing for five years Lester and his firm sold unregistered securities in two investment funds they managed CFI Fund LLC (CFI) and NuPower LLC (NuPower) raising approximately $10 million The SEC further alleged that the funds acted as unregistered investment companies and neither Lester nor his firm were registered as brokers or associated with registered brokers while trading in securities Additionally Lester purportedly devised a fraudulent scheme to use $28 million of CFI investment funds to meet his firmrsquos repayment obligation to a group of investment funds called Equity Edge that Lesterrsquos firm guaranteed Specifically the SEC alleged that Lesterrsquos firm transferred NuPower to Equity Edge for no consideration after which CFI purchased a 50 interest in NuPower from Equity Edge for $28 million CFIrsquos investors allegedly were not informed about the conflict of interest in the transaction or about the purchase The SEC is seeking among other relief permanent injunctions civil monetary penalties and disgorgement with prejudgment interest68 The action is pending

On June 29 2015 the SEC filed a settled AP against Welhouse amp Associates Inc (WAI) a state-registered investment adviser and its owner principal and CCO Mark Welhouse for an alleged ldquocherry-pickingrdquo scheme which purportedly violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act According to the SEC from February 2010 until January 2013 Welhouse and his firm allocated options trades in an SampP 500 exchange traded fund in a manner that violated his fiduciary duty Specifically the SEC claims that Welhouse disproportionately allocated profitable trades to his

personal and business accounts and allocated unprofitable trades to his advisory clients Welhouse allegedly made this unfair allocation through purchasing options in an omnibus account and delaying allocation of the purchases until after the value of the trades could be determined Without admitting or denying the SECrsquos findings Welhouse and WAI agreed to jointly and severally pay disgorgement of $418141 prejudgment interest of $5091860 and a $300000 civil monetary penalty In addition WAI was censured and Welhouse was barred from the securities industry69

3 Custody and Compliance Rules of the Advisers Act

On August 6 2015 the SEC instituted a settled AP against Reid S Johnson founder sole owner president and managing director of The Planning Group of Scottsdale LLC (TPGS) an Arizona-based investment adviser for allegedly aiding and abetting violations of Rules 206(4)-2 (the Custody Rule) and 206(4)-7 (the Compliance Rule) under the Advisers Act The Custody Rule imposes detailed requirements governing the manner in which a SEC-registered investment adviser must hold client assets and related obligations The Compliance Rule requires registered investment advisers to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act by the adviser and any of its supervised persons

The SEC alleged that TPGS violated the Custody Rule by failing to accurately determine the securities over which it had custody and by failing to ensure that the securities were maintained by a qualified custodian The SEC also charged that TPGS violated the Compliance Rule by failing to maintain an adequate compliance manual because TPGSrsquos compliance manual did not address the 2009 amendments to the custody rule Finally the SEC charged that TPGS and Johnson willfully made materially false representations in TPGSrsquos Forms ADV from 2010 through 201270 The action is ongoing

On August 6 2015 the SEC instituted a settled AP against a Texas-based investment advisory firm its sole owner and manager John P Bott and its former Chief Compliance Officer F Robert Falkenberg for allegedly violating the principal transaction prohibitions and Custody and Compliance Rules under the Advisers Act The SEC claimed that the investment advisory firm failed to provide any prior written disclosure or obtain consent from clients for at least 2000 securities transactions and

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 7

E Update on the SECrsquos Whistleblower Program

Notable whistleblower awards by the Commission in the second half of 2015 included an award on July 17 2015 of $3 million mdash the third-highest award ever under the Whistleblower Program mdash and an award of over $325000 on November 4 2015 28 In announcing the $325000 award the Commission included an admonition for future whistleblowers stating that ldquo[t]he whistleblower waited until after leaving [his employer] to come forward and agency officials say the award could have been higher had this whistleblower not hesitatedrdquo

The Commission announced a joint award of 20 of monetary sanctions to a pair of foreign whistleblowers on September 28 201529 and an award of 28 of sanctions to a separate whistleblower on September 29 201530 The announcements of these awards did not include specific amounts because monetary sanctions have yet to be collected

The SECrsquos Whistleblower Program also received a boost in 2015 from a decision by the Second Circuit regarding eligibility for anti-retaliation protection under Dodd-Frank The decision Berman v NeoOgilvy LLC deferred to the SECrsquos interpretation of ldquowhistleblowerrdquo in Dodd-Frank and held that a whistleblower could sue for retaliation under Dodd-Frank even if the whistleblower was retaliated against for disclosing information to an employer not the Commission31 The Second Circuit decision conflicts with the Fifth Circuitrsquos holding in Asadi v GE Energy that Dodd-Frankrsquos plain language only allowed an employee to sue for retaliation provisions if the employee was retaliated against for disclosing information to the SEC32

Berman could further the SECrsquos policy of encouraging internal reporting which is reflected in among other things Rule 21F-6(a)(4) of the Exchange Act which considers a whistleblowerrsquos participation in an entityrsquos internal reporting system a plus factor in determining the size of an award and Exchange Act Rule 21F-4(b)(7) which creates a 120-day ldquolook-back periodrdquo for whistleblowers who first report wrongdoing through an entityrsquos internal processes33 The look-back period allows a whistleblower to receive credit for reporting information as of the date of the internal report

Whistleblowers claiming to have been fired after reporting wrongdoing internally began bringing suits alleging violations of Dodd-Frankrsquos anti-retaliation provisions within a week of Berman For example on September 17 2015 a former branch manager at an international financial institution filed a whistleblower suit in the SDNY alleging that he had been fired after reporting a number of mortgage loans originated by unregistered loan officers in violation of federal mortgage laws34

Separately as the year came to a close reports emerged of a pending whistleblower award that could be the largest in the programrsquos history As described in Section IID above a large financial institution agreed to a $307 million settlement in December with the SEC and CFTC The actions against the bank reportedly stemmed from a whistleblower tip and based on the settlement amount the whistleblower could receive an award of over $90 million35 Even an award on the low end of the range however could easily surpass $30 million the highest award to date Such staggering awards can only boost the Whistleblower Programrsquos profile which could further increase reporting to the SEC

F Focus on Cybersecurity

In the spring of 2014 OCIE released a risk alert announcing that the SEC would examine registered broker-dealers and investment advisers to assess their cybersecurity preparedness 36 OCIE stated that its examinations would focus on cybersecurity governance identification and assessment of cybersecurity risks protection of networks and information risks associated with remote customer access and funds transfer requests risks associated with vendors and other third parties detection of unauthorized activity and experiences with certain cybersecurity threats OCIE completed its examinations on February 3 2015 and issued a report that criticized companies for failing to prevent cyberattacks notwithstanding written policies designed to prevent such attacks 37 The SECrsquos Division of Investment Management then released guidance for the protection of customer information that emphasized that broker-dealers and investment advisers should limit employee access to data employ encryption technologies and develop incident response plans38

Securities Enforcement 2015 Year-End Review Page 8

While the guidance was welcome it was arguably too general to be particularly useful much like the provisions of Rule 30(a) of Regulation S-P under the Securities Act (the Safeguards Rule) The Safeguards Rule generally requires that regulated entities adopt written policies and procedures that are reasonably designed to safeguard customer records and information However the rule does not define specific requirements for a reasonable cybersecurity program so it is possible that the mere event of a data breach is enough to show that a company lacks reasonably designed procedures Further even a large and sophisticated institution with an advanced cybersecurity policy still faces the risk of a cyberattack mdash and a potential violation of the Safeguards Rule mdash through the smaller less-sophisticated companies with which larger companies interact For example the hackers who stole customer data for 70 million of big-box retailer Targetrsquos customers in 2013 reportedly accessed Targetrsquos systems via the network of the small business responsible for Targetrsquos heating and air conditioning39

The SEC brought one of the first enforcement actions related to OCIErsquos cybersecurity review in the second half of 2015 and that action involved a third-party service provider Specifically on September 22 2015 the SEC instituted a settled AP against RT Jones Capital Equities Management Inc (RT Jones) for allegedly failing to adopt written policies and procedures reasonably designed to protect customer records and information in violation of the Safeguards Rule40 The SEC alleged that RT Jones stored sensitive personally identifiable information for over 100000 clients and other persons on a server hosted by a third-party vendor without adopting written policies and procedures for the security confidentiality or protection of that information The SEC also alleged that a July 22 2013 cyberattack left RT Jonesrsquos customersrsquo data vulnerable to theft Without admitting or denying the SECrsquos allegations RT Jones agreed to pay a $75000 civil monetary penalty Prior to the settlement RT Jones also engaged in remedial efforts by appointing an information security manager to oversee data security and protection and implementing a written information security policy

OCIE has announced that it will conduct a second round of cybersecurity reviews 41 which could lead to more enforcement actions With this additional review and the enforcement actions that are also likely to come calls may grow louder for the SEC to provide more detailed guidance on cybersecurity requirements

G Insider Trading in the Wake of United States v Newman

The Supreme Courtrsquos denial of certiorari in United States v Newman appeared to settle the debate over whether to succeed in an insider trading enforcement action where the SECrsquos only evidence of a personal benefit to the insider is the existence of a personal relationship with the tippee the SEC needed to offer ldquoproof of a meaningfully close personal relationship that generates an exchange that is objective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo42 The debate will continue for at least a few more months however as the Supreme Court recently granted certiorari in United States v Salman a case out of the Ninth Circuit that is likely to address the personal benefit standard set by the Second Circuit in Newman

The SEC may well seek to delay disposition of certain pending insider trading cases until the Supreme Court decides Salman as the SEC has felt the impact of Newman in recent cases On September 14 2015 the SEC suffered a rare defeat in an AP when an ALJ dismissed insider trading claims against Joseph Ruggieri a former trader at Wells Fargo Securities LLC ALJ Jason Patil found that although the SEC showed that Ruggieri traded on material non-public information on numerous occasions the allegations did not meet the SECrsquos burden under Newman to show that the corporate insider gave Ruggieri the information in exchange for a personal benefit ALJ Patil was not persuaded by the SECrsquos argument that Ruggieri received the information in exchange for positive feedback and instead found that it was more likely that Ruggierirsquos feedback was genuine and part of a standard practice as Ruggieri had given the corporate insider positive feedback even before being provided with material non-public information43

Newman may have also had a significant impact on the SECrsquos AP against Steven Cohen the former head of hedge fund SAC Capital Advisors LP (SAC Capital) which settled on January 8 2016 The SEC had alleged that during Cohenrsquos time at the helm of SAC Capital he failed to reasonably supervise high-performing traders Michael Steinberg and Mathew Martoma who had been criminally convicted of insider trading after jury trials The SECrsquos settlement order found that Cohen failed to supervise Martoma (Steinbergrsquos conviction was vacated after Newman for insufficient evidence of a personal benefit) ignored red flags that Martoma was engaged in insider

Securities Enforcement 2015 Year-End Review Page 9

trading and encouraged Martoma to talk to a doctor about nonpublic drug trial results to inform trading decisions

To settle the SECrsquos claims Cohen without admitting or denying wrongdoing agreed to retain an independent consultant to conduct periodic reviews of his family office firms to subject his firms to periodic SEC examinations and to be barred from supervising funds that manage outside money for two years The settlement allows the SEC to extend the time period during which Cohen must comply with these requirements in the event the Commission brings a new action against Cohen and requires any registered broker-dealer or investment advisor that retains Cohen in a supervisory capacity before 2020 to retain an independent consultant until the end of 201944

The SECrsquos AP against Cohen was perhaps the most anticipated AP in recent years and its sudden and surprising settlement which did not include a monetary penalty suggests that the Commission may have had serious concerns about its case in the wake of Newman

The continuing impact of Newman is now an open question in light of the Supreme Courtrsquos grant of certiorari in Salman The question as to which the Supreme Court granted certiorari in Salman is whether the personal benefit to the insider that is necessary to establish insider trading requires proof of an exchange that is ldquoobjective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo as the Second Circuit held in Newman45 The Ninth Circuitrsquos opinion in Salman written by SDNY Judge Jed Rakoff (sitting by designation) can be easily distinguished from Newman on its facts as it did not involve a remote tippee who lacked knowledge of any personal relationship between the insider and immediate tippee and because the personal relationship between tipper and tippee appeared to be far more meaningful than in Newman 46 Nevertheless the Supreme Courtrsquos decision may reach more broadly than the facts of either case to bring some clarity to insider trading law which could be a welcome development by all A decision in Salman is expected by the end of the Supreme Courtrsquos current term in June 2016

H Focus on Compliance Officers

The SECrsquos pursuit of enforcement actions against compliance professionals was one of the most divisive issues of 2015 As we reported in our Mid-Year Review after having typically limited enforcement actions against individuals with compliance authority to those who also had other management responsibilities or in cases of actual fraud the SEC brought claims in the first half of 2015 against individuals responsible solely for compliance and in the context of their compliance roles This sparked public statements of dissent and criticism from Commissioner Gallagher Commissioner Aguilar responded with a statement addressing the criticism and reassuring compliance professionals that the SEC was not interested in bringing enforcement actions against compliance professionals who were obeying the law and fulfilling their responsibilities Chair White added her voice to the debate on July 14 2015 assuring compliance professionals that ldquo[w]e do not bring cases based on second guessing compliance officersrsquo good faith judgments but rather when their actions or inactions cross a clear line that deserve sanctionrdquo47 And on November 4 2015 Enforcement Director Ceresney attempting to assuage the fears of compliance officers who worry they will be targeted reiterated that the overwhelming majority of the cases the SEC brings involve compliance officers who crossed a clear line by engaging in affirmative misconduct or obstructing regulators48

On August 5 2015 in an action illustrative of the types of acts that appear to result in enforcement actions against compliance officers ALJ Cameron Elliot found that Judy Wolf a former investment bank compliance officer aided and abetted her employerrsquos violation of the books and records provisions of the Exchange Act by altering documents during an SEC investigation After learning that the SEC was investigating Wolf admitted to altering her notes regarding a review of securities trades in a fast food chain restaurantrsquos stock that she did not flag for her superiors by including reports of takeover rumors that would have bolstered a conclusion that the trades were improper Although ALJ Elliot found that Wolf violated the Exchange Act he declined to sanction her because among other things he concluded that her violations were isolated and not egregious ALJ Elliot noted that some factors favored sanctions but held that Wolf was a low-level employee and sanctions would allow her employer to label her a ldquobad applerdquo and move on without examining its practices ALJ Elliot further alluded to the

Securities Enforcement 2015 Year-End Review Page 10

ongoing debate over the Commissionrsquos policy of bringing actions against compliance personnel by noting that sanctioning low-hanging fruit like Wolf could discourage competent persons from taking compliance positions49

On August 6 2015 the SEC agreed to settle claims it had brought against an investment advisory firm its CEO John P Bott II and its chief compliance officer Robert Falkenberg50 In March 2011 the SEC asked Falkenberg to provide copies of his 2010 review of the firmrsquos policies and procedures which Falkenberg allegedly told the Commission that he had conducted in February 2011 A review of the firmrsquos metadata however allegedly revealed that Falkenberg had not actually conducted his review until April 2011 and had only spent a few hours drafting his report which he never sent to the firmrsquos CEO The SEC claimed the firm had violated Sections 206(3) 206(4) and 206(4)(A) of the Investment Advisers Act of 1940 (the Advisers Act) and Rules 206(4)-2 206(4)-7 and 206(4)A-1 thereunder and that Bott and Falkenberg had aided and abetted the firmrsquos violations Pursuant to the settlement Bott agreed to pay $450000 in disgorgement to the firmrsquos clients plus prejudgment interest and Bott Falkenberg and the firm were ordered to pay civil monetary penalties in the amounts of $70000 $40000 and $200000 respectively for a total of more than $760000 Falkenberg was also required to complete 30 hours of compliance training for his alleged failure to monitor the firm by conducting an annual review of its policies and procedures

In addition to its recent actions involving compliance officers the SEC has been scrutinizing investment advisersrsquo growing use of outside CCOs For example on November 9 2015 OCIE released a report finding that several outsourced CCOs had not effectively implemented compliance programs for which they were responsible51 In its risk alert OCIE reported that ldquocertain outsourced CCOs could not articulate the business or compliance risksrdquo their firms faced or whether the firms had adopted written policies and procedures to mitigate those risks52 In other instances outside CCOs were not tailoring program templates to the adviserrsquos business meaning that the compliance materials were not applicable to the firm The SEC concluded that advisers with outsourced CCOs should review their business practices to ensure that CCOs have enough authority to implement compliance programs and policies

Even if the SEC follows through with its assurances that only compliance officers who cross a ldquoclear linerdquo will face

enforcement action the number of regulatory lines now drawn for compliance officers mdash and their new focus on outsourced compliance programs mdash makes it clear that this remains an area of heightened enforcement risk

III Selected Judicial Developments Several judicial opinions of significance to the SECrsquos enforcement program were issued in the second half of 2015 and we summarize four of the most significant opinions below First the DC Circuit held that the SEC could not retroactively apply the remedial provisions of Dodd-Frank concerning industry bars to punish conduct that occurred before Dodd-Frank was enacted Second the DC Circuit in a separate case held that Section 4E of the Exchange Act does not set a limitation period for the SEC to bring an enforcement action after issuing a Wells notice Third the Second Circuit issued a long-awaited decision in an appeal of a securities fraud conviction in Litvak that while coming in a criminal case will likely allow the SEC to continue to push the envelope for what constitutes a material misstatement Finally Judge Pauley of the SDNY criticized the SEC for its use of an asset freeze in connection with the collapse of a Cayman Islands bank

A Koch v SEC

On July 14 2015 the DC Circuit ruled in Koch v SEC that the SEC could not use remedial provisions of Dodd-Frank to punish an investment adviser for conduct that occurred before Dodd-Frank was enacted53 The SEC had instituted an AP against Donald Koch and his firm Koch Asset Management (KAM) alleging that Koch engaged in a scheme to manipulate the prices of stocks in which KAM had invested Koch purportedly instructed his broker on two different occasions in 2009 to increase the frequency of the brokerrsquos bids on stocks at the end of the trading day which had the effect of inflating the stocksrsquo prices The SEC alleged that Koch and KAM violated Section 10(b) of the Exchange Act and Section 206(1) of the Investment Company Act and requested among other things that Koch be barred from the securities industry

Prior to Dodd-Frank the SEC had the authority to bar individuals from associating with a subset of securities industry participants including broker-dealers and investment advisers Dodd-Frank however expanded the SECrsquos authority to bar individuals from associating with municipal advisors and ratings organizations a power it did not have prior to the passage of Dodd-Frank

Securities Enforcement 2015 Year-End Review Page 11

Although Kochrsquos alleged market manipulation occurred in 2009 a year before Dodd-Frank the SEC sought to bar Koch from the securities industry pursuant to its authority under Dodd-Frank

The presiding ALJ found that Koch engaged in market manipulation but only imposed a limited industry bar that barred Koch from associating with investment advisers Koch appealed to the Commission which not only affirmed the ALJrsquos findings but also expanded the industry bar imposed on Koch to include municipal advisers and ratings organizations Koch appealed the Commissionrsquos ruling to the DC Circuit which also affirmed that Koch had engaged in market manipulation but reversed the Commissionrsquos expansion of Kochrsquos industry bar The panel held that the SEC could not use Dodd-Frank to penalize Koch for conduct that occurred before the statute was enacted because Dodd-Frank did not expressly allow the SEC to apply its provisions retroactively and expanding Kochrsquos industry bar would ldquowould impair rights [Koch] possessed when he acted increase [Kochrsquos] liability for past conduct or impose new duties with respect to transactions already completedrdquo

A week after the DC Circuit ruled Commissioners Gallagher and Piwowar who had dissented from the SECrsquos order expanding Kochrsquos industry bar said in a joint statement that they were ldquopleasedrdquo with the courtrsquos holding and urged the SEC to address ldquoall impermissibly retroactive collateral bars that have been misapplied since the enactment of Dodd-Frankrdquo54

B Montford v SEC

On July 21 2015 the DC Circuit issued its opinion in Montford v SEC holding that the requirement under Section 4E of the Exchange Act that enforcement proceedings be brought within 180 days of a Wells notice (enacted with Dodd Frank) is not an enforceable jurisdictional requirement 55 Montford arose from an appeal of a final order from the Commission finding that respondents violated Sections 204 206 and 207 of the Advisors Act for among other things allegedly failing to disclose the receipt of fees from an investment manager while disclosing to customers that it was ldquoindependentrdquo and ldquoconflict freerdquo The Commission barred respondents from the securities industry required the disgorgement of $210000 and imposed civil penalties56

Respondents appealed the Commissionrsquos order to the DC Circuit raising two challenges each of which the court rejected First respondents argued that the institution of administrative proceedings more than 180 days after issuing a Wells notice violated Section 4E of the Exchange Act and required dismissal Section 4E of the Exchange Act provides that ldquo[n]ot later than 180 days after the date on which Commission staff provide a written Wells notification to any person the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent not to file an actionrdquo The deadline of Section 4E may be extended by the Director of the Division of Enforcement ldquofor certain complex actionsrdquo which the Commission submitted happened in the instant case 57 Without reaching the issue of whether the Commission properly extended the Section 4E deadline the court found that Section 4E of the Exchange Act was ambiguous as to whether its violation served to bar an action by the Commission Accordingly the court concluded that under Chevron the Commissionrsquos interpretation that Section 4E is not a jurisdictional bar was entitled to deference as long as it was reasonable which the court found it was

Second respondents argued that the Commission abused its discretion in imposing civil penalties and ordering disgorgement because in respondentsrsquo view the receipt of money was not illegal and there was no causal link between the Commissionrsquos order of penalties and disgorgement and the alleged nondisclosure The court rejected this argument too noting that the Commission has flexibility in imposing such penalties which will be upheld as long as they are reasonable

Because the Enforcement Division is generally diligent about ensuring that enforcement actions are filed within 180 days of a Wells notice (or seeking an extension from the Division Director) Montford may have limited practical impact More surprising is arguably the judicial finding of ambiguity in a statute that left little room for interpretation

C SEC v Caledonian Bank

On November 10 2015 in SEC v Caledonian Bank Judge William H Pauley III of the Southern District of New York denied the defendantsrsquo motion to dismiss an SEC complaint that defendants had engaged in unregistered sales of securities in violation of Sections 5(a) and 5(c) of the Securities Act as part of an alleged

Securities Enforcement 2015 Year-End Review Page 12

penny stock ldquopump-and-dumprdquo scheme that the SEC claimed netted them profits of $75 million According to the SEC the defendants allegedly aggressively marketed the stocks of four companies that contained few assets using a series of sham transactions to conceal beneficial ownership of the securities before offering them to the public The opinion on a motion to dismiss would likely be of limited interest if only considered for its holding

In declining to dismiss the pending case however Judge William H Pauley III aggressively criticized the SECrsquos failure to coordinate its enforcement efforts which he stated led to unintended consequences and collateral victims According to the courtrsquos opinion at the same time a team of Washington DC-based SEC attorneys had persuaded Judge Pauley in February 2015 to freeze the assets of a Cayman Islands bank that allegedly sold the fraudulent securities another team of New York-based SEC attorneys who were investigating the some of the same defendants had information showing that the bank had not sold the securities for its own account but merely acted as a broker According to the Judge Pauley the freeze order (which was predicated in part on the belief that the bank had not acted as a broker) had the effect of bankrupting the bank shortly thereafter Judge Pauley blamed the SECrsquos ldquobureaucratic siloingrdquo for causing what he described as an unfortunate and unnecessary outcome In a broader criticism of the SEC Judge Pauley stated ldquoit is hard to believe that those charged with overseeing enforcement are not monitoring activities to avoid needless duplication of effortrdquo and that ldquo[g]iven the high stakes in securities enforcement actions and in the face of a workload the SEC describes as an lsquooverwhelming burdenrsquo a self-examination may be appropriaterdquo It remains to be seen what impact the criticism will have

D United States v Litvak

On December 8 2015 in a highly anticipated ruling the United States Court of Appeals for the Second Circuit reversed bond trader Jesse Litvakrsquos conviction on false statement charges and vacated his conviction on securities fraud charges58 The panel held that the trial court abused its discretion when it excluded critical expert testimony regarding pricing in the bond market which could have bolstered Litvakrsquos arguments that his allegedly false statements were not material The panel only vacated Litvakrsquos securities fraud conviction however rejecting his central argument that the statements at issue were immaterial as a matter of law The SEC had brought a parallel civil action against Litvak arising out of the same

allegations which remains on hold pending the outcome of Litvakrsquos criminal case59

The panelrsquos decision was not a complete win for Litvak and could have broad implications for future SEC actions Litvakrsquos central defense at trial and on appeal was that his alleged misrepresentations which related to the profit he stood to make from counterparties on bond transactions were immaterial as a matter of law Specifically he argued that the statements were immaterial as a matter of law because they related to how much Litvak paid for the securities himself and had no impact on the value of the securities themselves Put another way Litvak argued that counterparties could not have considered his false statements important because they did not pertain to any objective valuation of the underlying securities

The panel rejected Litvakrsquos arguments pointing to testimony from Litvakrsquos counterparties who stated that Litvakrsquos alleged misstatements were ldquoimportantrdquo to them and that the counterparties were injured by those misrepresentations by ultimately paying more than they would otherwise have bid for the securities Even though Litvak had credibly argued that the kind of statements at issue were a common business practice that should have had no relevance to pricing the panel concluded the testimony precluded a finding that no reasonable mind could find Litvakrsquos statements material And although the decision was not written as though it broke new ground the panelrsquos approach to materiality and deference to what investors considered to be important may have a lasting impact on the way the SEC pursues investigations by putting a greater focus on gathering evidence concerning investorsrsquo expectations At the same time the courtrsquos decision that excluding Litvakrsquos proffered materiality expert was an abuse of discretion will ensure that future defendants have more leeway to argue their positions in court

In sum while the district court cannot dismiss the remaining charges against Litvak on materiality grounds Litvak will have much more ammunition to fight these charges at trial And for future defendants (in both criminal and SEC actions) this opinion is a stark reminder that questions of materiality are highly fact-specific and that no misrepresentation should be presumed to be harmless or immune from prosecution

Securities Enforcement 2015 Year-End Review Page 13

IV Selected Significant Investigations and Cases

Below we highlight some of the more notable SEC enforcement actions from the latter half of 2015

A Investment Advisers

The SEC continued its especially vigorous oversight of investment advisers in 2015 It brought enforcement actions focused on representations of investment risk and performance disclosure of conflicts of interest the Custody and Compliance Rules of the Advisers Act and disclosure of fees and expenses while signaling a particularly increased focus on private equity

1 Misrepresentation of Investment Risk and Performance

On July 31 2015 the SEC filed a settled AP against a financial advisory firm and its founder Walter F Grenda Jr The SEC alleged that Grenda made false and misleading statements to the firmrsquos advisory clients in recommending and selling investments in a hedge fund called Prestige Wealth Management Fund LP (Prestige Fund) Grendarsquos statements allegedly misled clients into believing that the investments were less risky than they actually were Grenda also allegedly borrowed $175000 from two of his clients which the SEC claimed he misrepresented would be for business purposes but which he spent on personal expenses and debts In its settlement order the SEC found that the advisory firm and Grenda violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder The SEC also found that the advisory firm and Grenda violated Sections 206(1) and 206(2) of the Advisers Act and that Grenda willfully aided and abetted Prestige Fundrsquos violations of Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder The advisory firm was censured by the Commission and had its registration as an investment adviser revoked but did not pay any financial penalties Without admitting or denying wrongdoing Grenda agreed to pay $7741091 consisting of a $50000 civil monetary penalty and $2241091 in disgorgement and prejudgment interest60

On August 4 2015 the SEC instituted a settled AP against Gold Mountain LLC an investment adviser in Iowa and its founder Gregory Bied for allegedly defrauding investors through false statements in quarterly reports

Allegedly Gold Mountain and Bied made false statements from 2012 through mid-2014 to investors in a hedge fund managed by Gold Mountain namely that the fund was achieving positive quarterly returns when in fact the hedge fund had lost around 75 of its value over that time The SEC claimed that Gold Mountain and Bied violated Sections 9(b) and 206(4) of the Advisers Act Without admitting or denying the SECrsquos findings Gold Mountain and Bied consented to an industry bar and to pay a civil monetary penalty of $200000 which will be distributed to investors61

On November 30 2015 the SEC instituted settled APs against investment adviser Alpha Fiduciary Inc (AFI) Arthur Doglione AFIrsquos majority owner and president and Michael Shea AFIrsquos vice president and business development director The SEC alleged that AFIrsquos executive summaries firm profiles presentations and advertising materials contained certain hypothetical performance information but did not disclose that this data was completely hypothetical Moreover the SEC claimed that while some of AFIrsquos materials contained disclosure language the disclosure language did not appear on the same page as the hypothetical performance data rendering it misleading The SEC also found that although AFIrsquos compliance and procedures manual required the chief compliance officerrsquos prior review and approval of any marketing materials Doglione had exercised sole authority over AFIrsquos policies and procedures Thus the SEC alleged that he was solely responsible for the review and approval of AFIrsquos marketing materials prior to their distribution to clients or prospective clients The SEC also claimed that Shea knew that some of the data was hypothetical yet still included this information in materials he sent to clients Moreover Shea allegedly provided prospective clients with a report of an existing clientrsquos portfolio which represented a 144 return without taking any steps to determine if it was representative of the performance of other AFI clients The SEC claimed that AFI Doglione and Shea violated Sections 206(2) and 206(4) of the Advisers Act As part of the settlement the parties without admitting or denying the Commissionrsquos findings agreed to censures and a total of $550000 in penalties AFI agreed to pay a civil monetary penalty of $250000 to notify existing and prospective clients of the SECrsquos order and to obtain an independent compliance consultant Doglione agreed to a civil monetary penalty of $250000 and Shea agreed to a civil monetary penalty of $2500062

Securities Enforcement 2015 Year-End Review Page 14

2 Conflicts of Interest

On July 24 2015 the SEC instituted a settled AP against investment adviser Dion Money Management LLC (Dion) for allegedly failing to disclose adequately to clients a compensation arrangement whereby Dion received payments from third parties when client assets were invested in certain mutual funds The SEC asserted that although Dion disclosed the conflict of interest it understated the maximum payment rate under the arrangements with third parties and omitted the possibility that investors would receive payments from multiple parties based on the same client assets The SEC found that Dion violated Sections 206(2) and 207 of the Advisers Act Without admitting or denying the SECrsquos findings Dion agreed to amend its disclosures to provide notice to its clients of the SECrsquos order and pay a civil monetary penalty of $50000 63

On August 6 2015 the SEC instituted a settled AP against Tri-Star Advisors (TSA) TSA CEO William T Payne and TSA president Jon C Vaughan for alleged violations of the Advisers Act The SEC alleged that TSA made investment recommendations to its clients and executed trades while charging clients a sales credit ie a percentage mark-up without disclosing the credit to clients Payne and Vaughan allegedly received 55 of the sales credit generated by each trade The SEC claimed that TSA violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and that Payne and Vaughan caused TSA to violate Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the Commissionrsquos findings the respondents agreed to pay $779149 to settle the SECrsquos claims TSA agreed to pay a $150000 civil monetary penalty Payne agreed to pay disgorgement of $142500 prejudgment interest of $323521 and a civil monetary penalty of $19563521 and Vaughan agreed to pay disgorgement of $232500 prejudgment interest of $527850 and a civil monetary penalty of $5000064

On August 10 2015 the SEC instituted a settled AP against an investment management company for allegedly failing to disclose a conflict The SEC claimed that an advisory client made a $50 million loan to a senior executive which the SEC claimed allowed the executive to personally participate in an acquisition led by the management companyrsquos parent Allegedly the management company subsequently invested certain other clientsrsquo funds in two transactions in which the advisory client had invested on different terms The SEC asserted

that the management company thus breached its fiduciary duty by failing to disclose the potential conflict of interest to both sets of clients The SEC also alleged that the management company violated the Advisers Act by inadvertently billing a client approximately $65 million in asset management fees on non-managed assets by inaccurately coding the non-managed assets Finally the SEC alleged that the management company failed to implement certain compliance policies and procedures enforce its code of ethics and maintain required books and records The SEC found that the management company violated Sections 206(2) 206(4) 204(a) and 204A of the Advisers Act and Rules 206(4)-7 204-2(a)(3) 204-2(a)(5) and 204A-1 thereunder The management company agreed to pay a $20 million penalty without admitting or denying the Commissionrsquos findings65

Also on September 29 2015 the SEC filed a complaint in federal court against Lee D Weiss and his investment advisory firm Family Endowment Partners LP (FEP) for allegedly misappropriating investments and concealing conflicts of interest Weiss and FEP allegedly advised their clients to make investments in companies Weiss owned and controlled without telling the clients of their relationship to the companies The SEC claimed that Weiss and FEP then used the investment funds to pay FEPrsquos financial obligations and delinquent interest owed to other clients The SEC further claimed Weiss and FEP advised clients to invest approximately $5 million in a portfolio of consumer loans with a company that offered to pay an annual return of 18 but Weiss structured the investments so his clients received only 9 while he pocketed the remaining 9 The SEC claimed that Weiss and FEP violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Sections 206(1) 206(2) 206(3) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and Section 204(b)(5) of the Advisers Act and Rule 204-1 thereunder The SEC is seeking disgorgement from Weiss FEB and several companies owned by Weiss66 The action is ongoing

On September 30 2015 the SEC settled claims against Focus Media Holding Ltd (Focus) a China-based advertising company and its founder Jason Jiang The SEC alleged Focus and Jiang failed to adequately disclose the partial sale of securities of Focusrsquos wholly owned subsidiary Allyes Online Media Holdings Ltd (Allyes) to certain Allyes and Focus insiders before the securities

Securities Enforcement 2015 Year-End Review Page 15

were sold to a private equity firm Allegedly the securities were sold to the private equity firm at approximately six times the price the insiders had paid for the securities The SEC alleged that the failure to disclose the sales to insiders violated the reporting and antifraud provisions of the federal securities laws Without admitting or denying the SECrsquos allegations Focus agreed to pay a civil monetary penalty of $346 million and Jiang agreed to pay a civil monetary penalty of $969 million disgorgement of $9690000 and prejudgment interest of $164786567

On October 16 2015 the SEC filed a civil injunctive action in federal court in the District of Colorado against Donald J Lester and his private equity firm alleging violations of the federal securities laws The SEC alleged that starting in January 2010 and continuing for five years Lester and his firm sold unregistered securities in two investment funds they managed CFI Fund LLC (CFI) and NuPower LLC (NuPower) raising approximately $10 million The SEC further alleged that the funds acted as unregistered investment companies and neither Lester nor his firm were registered as brokers or associated with registered brokers while trading in securities Additionally Lester purportedly devised a fraudulent scheme to use $28 million of CFI investment funds to meet his firmrsquos repayment obligation to a group of investment funds called Equity Edge that Lesterrsquos firm guaranteed Specifically the SEC alleged that Lesterrsquos firm transferred NuPower to Equity Edge for no consideration after which CFI purchased a 50 interest in NuPower from Equity Edge for $28 million CFIrsquos investors allegedly were not informed about the conflict of interest in the transaction or about the purchase The SEC is seeking among other relief permanent injunctions civil monetary penalties and disgorgement with prejudgment interest68 The action is pending

On June 29 2015 the SEC filed a settled AP against Welhouse amp Associates Inc (WAI) a state-registered investment adviser and its owner principal and CCO Mark Welhouse for an alleged ldquocherry-pickingrdquo scheme which purportedly violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act According to the SEC from February 2010 until January 2013 Welhouse and his firm allocated options trades in an SampP 500 exchange traded fund in a manner that violated his fiduciary duty Specifically the SEC claims that Welhouse disproportionately allocated profitable trades to his

personal and business accounts and allocated unprofitable trades to his advisory clients Welhouse allegedly made this unfair allocation through purchasing options in an omnibus account and delaying allocation of the purchases until after the value of the trades could be determined Without admitting or denying the SECrsquos findings Welhouse and WAI agreed to jointly and severally pay disgorgement of $418141 prejudgment interest of $5091860 and a $300000 civil monetary penalty In addition WAI was censured and Welhouse was barred from the securities industry69

3 Custody and Compliance Rules of the Advisers Act

On August 6 2015 the SEC instituted a settled AP against Reid S Johnson founder sole owner president and managing director of The Planning Group of Scottsdale LLC (TPGS) an Arizona-based investment adviser for allegedly aiding and abetting violations of Rules 206(4)-2 (the Custody Rule) and 206(4)-7 (the Compliance Rule) under the Advisers Act The Custody Rule imposes detailed requirements governing the manner in which a SEC-registered investment adviser must hold client assets and related obligations The Compliance Rule requires registered investment advisers to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act by the adviser and any of its supervised persons

The SEC alleged that TPGS violated the Custody Rule by failing to accurately determine the securities over which it had custody and by failing to ensure that the securities were maintained by a qualified custodian The SEC also charged that TPGS violated the Compliance Rule by failing to maintain an adequate compliance manual because TPGSrsquos compliance manual did not address the 2009 amendments to the custody rule Finally the SEC charged that TPGS and Johnson willfully made materially false representations in TPGSrsquos Forms ADV from 2010 through 201270 The action is ongoing

On August 6 2015 the SEC instituted a settled AP against a Texas-based investment advisory firm its sole owner and manager John P Bott and its former Chief Compliance Officer F Robert Falkenberg for allegedly violating the principal transaction prohibitions and Custody and Compliance Rules under the Advisers Act The SEC claimed that the investment advisory firm failed to provide any prior written disclosure or obtain consent from clients for at least 2000 securities transactions and

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 8

While the guidance was welcome it was arguably too general to be particularly useful much like the provisions of Rule 30(a) of Regulation S-P under the Securities Act (the Safeguards Rule) The Safeguards Rule generally requires that regulated entities adopt written policies and procedures that are reasonably designed to safeguard customer records and information However the rule does not define specific requirements for a reasonable cybersecurity program so it is possible that the mere event of a data breach is enough to show that a company lacks reasonably designed procedures Further even a large and sophisticated institution with an advanced cybersecurity policy still faces the risk of a cyberattack mdash and a potential violation of the Safeguards Rule mdash through the smaller less-sophisticated companies with which larger companies interact For example the hackers who stole customer data for 70 million of big-box retailer Targetrsquos customers in 2013 reportedly accessed Targetrsquos systems via the network of the small business responsible for Targetrsquos heating and air conditioning39

The SEC brought one of the first enforcement actions related to OCIErsquos cybersecurity review in the second half of 2015 and that action involved a third-party service provider Specifically on September 22 2015 the SEC instituted a settled AP against RT Jones Capital Equities Management Inc (RT Jones) for allegedly failing to adopt written policies and procedures reasonably designed to protect customer records and information in violation of the Safeguards Rule40 The SEC alleged that RT Jones stored sensitive personally identifiable information for over 100000 clients and other persons on a server hosted by a third-party vendor without adopting written policies and procedures for the security confidentiality or protection of that information The SEC also alleged that a July 22 2013 cyberattack left RT Jonesrsquos customersrsquo data vulnerable to theft Without admitting or denying the SECrsquos allegations RT Jones agreed to pay a $75000 civil monetary penalty Prior to the settlement RT Jones also engaged in remedial efforts by appointing an information security manager to oversee data security and protection and implementing a written information security policy

OCIE has announced that it will conduct a second round of cybersecurity reviews 41 which could lead to more enforcement actions With this additional review and the enforcement actions that are also likely to come calls may grow louder for the SEC to provide more detailed guidance on cybersecurity requirements

G Insider Trading in the Wake of United States v Newman

The Supreme Courtrsquos denial of certiorari in United States v Newman appeared to settle the debate over whether to succeed in an insider trading enforcement action where the SECrsquos only evidence of a personal benefit to the insider is the existence of a personal relationship with the tippee the SEC needed to offer ldquoproof of a meaningfully close personal relationship that generates an exchange that is objective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo42 The debate will continue for at least a few more months however as the Supreme Court recently granted certiorari in United States v Salman a case out of the Ninth Circuit that is likely to address the personal benefit standard set by the Second Circuit in Newman

The SEC may well seek to delay disposition of certain pending insider trading cases until the Supreme Court decides Salman as the SEC has felt the impact of Newman in recent cases On September 14 2015 the SEC suffered a rare defeat in an AP when an ALJ dismissed insider trading claims against Joseph Ruggieri a former trader at Wells Fargo Securities LLC ALJ Jason Patil found that although the SEC showed that Ruggieri traded on material non-public information on numerous occasions the allegations did not meet the SECrsquos burden under Newman to show that the corporate insider gave Ruggieri the information in exchange for a personal benefit ALJ Patil was not persuaded by the SECrsquos argument that Ruggieri received the information in exchange for positive feedback and instead found that it was more likely that Ruggierirsquos feedback was genuine and part of a standard practice as Ruggieri had given the corporate insider positive feedback even before being provided with material non-public information43

Newman may have also had a significant impact on the SECrsquos AP against Steven Cohen the former head of hedge fund SAC Capital Advisors LP (SAC Capital) which settled on January 8 2016 The SEC had alleged that during Cohenrsquos time at the helm of SAC Capital he failed to reasonably supervise high-performing traders Michael Steinberg and Mathew Martoma who had been criminally convicted of insider trading after jury trials The SECrsquos settlement order found that Cohen failed to supervise Martoma (Steinbergrsquos conviction was vacated after Newman for insufficient evidence of a personal benefit) ignored red flags that Martoma was engaged in insider

Securities Enforcement 2015 Year-End Review Page 9

trading and encouraged Martoma to talk to a doctor about nonpublic drug trial results to inform trading decisions

To settle the SECrsquos claims Cohen without admitting or denying wrongdoing agreed to retain an independent consultant to conduct periodic reviews of his family office firms to subject his firms to periodic SEC examinations and to be barred from supervising funds that manage outside money for two years The settlement allows the SEC to extend the time period during which Cohen must comply with these requirements in the event the Commission brings a new action against Cohen and requires any registered broker-dealer or investment advisor that retains Cohen in a supervisory capacity before 2020 to retain an independent consultant until the end of 201944

The SECrsquos AP against Cohen was perhaps the most anticipated AP in recent years and its sudden and surprising settlement which did not include a monetary penalty suggests that the Commission may have had serious concerns about its case in the wake of Newman

The continuing impact of Newman is now an open question in light of the Supreme Courtrsquos grant of certiorari in Salman The question as to which the Supreme Court granted certiorari in Salman is whether the personal benefit to the insider that is necessary to establish insider trading requires proof of an exchange that is ldquoobjective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo as the Second Circuit held in Newman45 The Ninth Circuitrsquos opinion in Salman written by SDNY Judge Jed Rakoff (sitting by designation) can be easily distinguished from Newman on its facts as it did not involve a remote tippee who lacked knowledge of any personal relationship between the insider and immediate tippee and because the personal relationship between tipper and tippee appeared to be far more meaningful than in Newman 46 Nevertheless the Supreme Courtrsquos decision may reach more broadly than the facts of either case to bring some clarity to insider trading law which could be a welcome development by all A decision in Salman is expected by the end of the Supreme Courtrsquos current term in June 2016

H Focus on Compliance Officers

The SECrsquos pursuit of enforcement actions against compliance professionals was one of the most divisive issues of 2015 As we reported in our Mid-Year Review after having typically limited enforcement actions against individuals with compliance authority to those who also had other management responsibilities or in cases of actual fraud the SEC brought claims in the first half of 2015 against individuals responsible solely for compliance and in the context of their compliance roles This sparked public statements of dissent and criticism from Commissioner Gallagher Commissioner Aguilar responded with a statement addressing the criticism and reassuring compliance professionals that the SEC was not interested in bringing enforcement actions against compliance professionals who were obeying the law and fulfilling their responsibilities Chair White added her voice to the debate on July 14 2015 assuring compliance professionals that ldquo[w]e do not bring cases based on second guessing compliance officersrsquo good faith judgments but rather when their actions or inactions cross a clear line that deserve sanctionrdquo47 And on November 4 2015 Enforcement Director Ceresney attempting to assuage the fears of compliance officers who worry they will be targeted reiterated that the overwhelming majority of the cases the SEC brings involve compliance officers who crossed a clear line by engaging in affirmative misconduct or obstructing regulators48

On August 5 2015 in an action illustrative of the types of acts that appear to result in enforcement actions against compliance officers ALJ Cameron Elliot found that Judy Wolf a former investment bank compliance officer aided and abetted her employerrsquos violation of the books and records provisions of the Exchange Act by altering documents during an SEC investigation After learning that the SEC was investigating Wolf admitted to altering her notes regarding a review of securities trades in a fast food chain restaurantrsquos stock that she did not flag for her superiors by including reports of takeover rumors that would have bolstered a conclusion that the trades were improper Although ALJ Elliot found that Wolf violated the Exchange Act he declined to sanction her because among other things he concluded that her violations were isolated and not egregious ALJ Elliot noted that some factors favored sanctions but held that Wolf was a low-level employee and sanctions would allow her employer to label her a ldquobad applerdquo and move on without examining its practices ALJ Elliot further alluded to the

Securities Enforcement 2015 Year-End Review Page 10

ongoing debate over the Commissionrsquos policy of bringing actions against compliance personnel by noting that sanctioning low-hanging fruit like Wolf could discourage competent persons from taking compliance positions49

On August 6 2015 the SEC agreed to settle claims it had brought against an investment advisory firm its CEO John P Bott II and its chief compliance officer Robert Falkenberg50 In March 2011 the SEC asked Falkenberg to provide copies of his 2010 review of the firmrsquos policies and procedures which Falkenberg allegedly told the Commission that he had conducted in February 2011 A review of the firmrsquos metadata however allegedly revealed that Falkenberg had not actually conducted his review until April 2011 and had only spent a few hours drafting his report which he never sent to the firmrsquos CEO The SEC claimed the firm had violated Sections 206(3) 206(4) and 206(4)(A) of the Investment Advisers Act of 1940 (the Advisers Act) and Rules 206(4)-2 206(4)-7 and 206(4)A-1 thereunder and that Bott and Falkenberg had aided and abetted the firmrsquos violations Pursuant to the settlement Bott agreed to pay $450000 in disgorgement to the firmrsquos clients plus prejudgment interest and Bott Falkenberg and the firm were ordered to pay civil monetary penalties in the amounts of $70000 $40000 and $200000 respectively for a total of more than $760000 Falkenberg was also required to complete 30 hours of compliance training for his alleged failure to monitor the firm by conducting an annual review of its policies and procedures

In addition to its recent actions involving compliance officers the SEC has been scrutinizing investment advisersrsquo growing use of outside CCOs For example on November 9 2015 OCIE released a report finding that several outsourced CCOs had not effectively implemented compliance programs for which they were responsible51 In its risk alert OCIE reported that ldquocertain outsourced CCOs could not articulate the business or compliance risksrdquo their firms faced or whether the firms had adopted written policies and procedures to mitigate those risks52 In other instances outside CCOs were not tailoring program templates to the adviserrsquos business meaning that the compliance materials were not applicable to the firm The SEC concluded that advisers with outsourced CCOs should review their business practices to ensure that CCOs have enough authority to implement compliance programs and policies

Even if the SEC follows through with its assurances that only compliance officers who cross a ldquoclear linerdquo will face

enforcement action the number of regulatory lines now drawn for compliance officers mdash and their new focus on outsourced compliance programs mdash makes it clear that this remains an area of heightened enforcement risk

III Selected Judicial Developments Several judicial opinions of significance to the SECrsquos enforcement program were issued in the second half of 2015 and we summarize four of the most significant opinions below First the DC Circuit held that the SEC could not retroactively apply the remedial provisions of Dodd-Frank concerning industry bars to punish conduct that occurred before Dodd-Frank was enacted Second the DC Circuit in a separate case held that Section 4E of the Exchange Act does not set a limitation period for the SEC to bring an enforcement action after issuing a Wells notice Third the Second Circuit issued a long-awaited decision in an appeal of a securities fraud conviction in Litvak that while coming in a criminal case will likely allow the SEC to continue to push the envelope for what constitutes a material misstatement Finally Judge Pauley of the SDNY criticized the SEC for its use of an asset freeze in connection with the collapse of a Cayman Islands bank

A Koch v SEC

On July 14 2015 the DC Circuit ruled in Koch v SEC that the SEC could not use remedial provisions of Dodd-Frank to punish an investment adviser for conduct that occurred before Dodd-Frank was enacted53 The SEC had instituted an AP against Donald Koch and his firm Koch Asset Management (KAM) alleging that Koch engaged in a scheme to manipulate the prices of stocks in which KAM had invested Koch purportedly instructed his broker on two different occasions in 2009 to increase the frequency of the brokerrsquos bids on stocks at the end of the trading day which had the effect of inflating the stocksrsquo prices The SEC alleged that Koch and KAM violated Section 10(b) of the Exchange Act and Section 206(1) of the Investment Company Act and requested among other things that Koch be barred from the securities industry

Prior to Dodd-Frank the SEC had the authority to bar individuals from associating with a subset of securities industry participants including broker-dealers and investment advisers Dodd-Frank however expanded the SECrsquos authority to bar individuals from associating with municipal advisors and ratings organizations a power it did not have prior to the passage of Dodd-Frank

Securities Enforcement 2015 Year-End Review Page 11

Although Kochrsquos alleged market manipulation occurred in 2009 a year before Dodd-Frank the SEC sought to bar Koch from the securities industry pursuant to its authority under Dodd-Frank

The presiding ALJ found that Koch engaged in market manipulation but only imposed a limited industry bar that barred Koch from associating with investment advisers Koch appealed to the Commission which not only affirmed the ALJrsquos findings but also expanded the industry bar imposed on Koch to include municipal advisers and ratings organizations Koch appealed the Commissionrsquos ruling to the DC Circuit which also affirmed that Koch had engaged in market manipulation but reversed the Commissionrsquos expansion of Kochrsquos industry bar The panel held that the SEC could not use Dodd-Frank to penalize Koch for conduct that occurred before the statute was enacted because Dodd-Frank did not expressly allow the SEC to apply its provisions retroactively and expanding Kochrsquos industry bar would ldquowould impair rights [Koch] possessed when he acted increase [Kochrsquos] liability for past conduct or impose new duties with respect to transactions already completedrdquo

A week after the DC Circuit ruled Commissioners Gallagher and Piwowar who had dissented from the SECrsquos order expanding Kochrsquos industry bar said in a joint statement that they were ldquopleasedrdquo with the courtrsquos holding and urged the SEC to address ldquoall impermissibly retroactive collateral bars that have been misapplied since the enactment of Dodd-Frankrdquo54

B Montford v SEC

On July 21 2015 the DC Circuit issued its opinion in Montford v SEC holding that the requirement under Section 4E of the Exchange Act that enforcement proceedings be brought within 180 days of a Wells notice (enacted with Dodd Frank) is not an enforceable jurisdictional requirement 55 Montford arose from an appeal of a final order from the Commission finding that respondents violated Sections 204 206 and 207 of the Advisors Act for among other things allegedly failing to disclose the receipt of fees from an investment manager while disclosing to customers that it was ldquoindependentrdquo and ldquoconflict freerdquo The Commission barred respondents from the securities industry required the disgorgement of $210000 and imposed civil penalties56

Respondents appealed the Commissionrsquos order to the DC Circuit raising two challenges each of which the court rejected First respondents argued that the institution of administrative proceedings more than 180 days after issuing a Wells notice violated Section 4E of the Exchange Act and required dismissal Section 4E of the Exchange Act provides that ldquo[n]ot later than 180 days after the date on which Commission staff provide a written Wells notification to any person the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent not to file an actionrdquo The deadline of Section 4E may be extended by the Director of the Division of Enforcement ldquofor certain complex actionsrdquo which the Commission submitted happened in the instant case 57 Without reaching the issue of whether the Commission properly extended the Section 4E deadline the court found that Section 4E of the Exchange Act was ambiguous as to whether its violation served to bar an action by the Commission Accordingly the court concluded that under Chevron the Commissionrsquos interpretation that Section 4E is not a jurisdictional bar was entitled to deference as long as it was reasonable which the court found it was

Second respondents argued that the Commission abused its discretion in imposing civil penalties and ordering disgorgement because in respondentsrsquo view the receipt of money was not illegal and there was no causal link between the Commissionrsquos order of penalties and disgorgement and the alleged nondisclosure The court rejected this argument too noting that the Commission has flexibility in imposing such penalties which will be upheld as long as they are reasonable

Because the Enforcement Division is generally diligent about ensuring that enforcement actions are filed within 180 days of a Wells notice (or seeking an extension from the Division Director) Montford may have limited practical impact More surprising is arguably the judicial finding of ambiguity in a statute that left little room for interpretation

C SEC v Caledonian Bank

On November 10 2015 in SEC v Caledonian Bank Judge William H Pauley III of the Southern District of New York denied the defendantsrsquo motion to dismiss an SEC complaint that defendants had engaged in unregistered sales of securities in violation of Sections 5(a) and 5(c) of the Securities Act as part of an alleged

Securities Enforcement 2015 Year-End Review Page 12

penny stock ldquopump-and-dumprdquo scheme that the SEC claimed netted them profits of $75 million According to the SEC the defendants allegedly aggressively marketed the stocks of four companies that contained few assets using a series of sham transactions to conceal beneficial ownership of the securities before offering them to the public The opinion on a motion to dismiss would likely be of limited interest if only considered for its holding

In declining to dismiss the pending case however Judge William H Pauley III aggressively criticized the SECrsquos failure to coordinate its enforcement efforts which he stated led to unintended consequences and collateral victims According to the courtrsquos opinion at the same time a team of Washington DC-based SEC attorneys had persuaded Judge Pauley in February 2015 to freeze the assets of a Cayman Islands bank that allegedly sold the fraudulent securities another team of New York-based SEC attorneys who were investigating the some of the same defendants had information showing that the bank had not sold the securities for its own account but merely acted as a broker According to the Judge Pauley the freeze order (which was predicated in part on the belief that the bank had not acted as a broker) had the effect of bankrupting the bank shortly thereafter Judge Pauley blamed the SECrsquos ldquobureaucratic siloingrdquo for causing what he described as an unfortunate and unnecessary outcome In a broader criticism of the SEC Judge Pauley stated ldquoit is hard to believe that those charged with overseeing enforcement are not monitoring activities to avoid needless duplication of effortrdquo and that ldquo[g]iven the high stakes in securities enforcement actions and in the face of a workload the SEC describes as an lsquooverwhelming burdenrsquo a self-examination may be appropriaterdquo It remains to be seen what impact the criticism will have

D United States v Litvak

On December 8 2015 in a highly anticipated ruling the United States Court of Appeals for the Second Circuit reversed bond trader Jesse Litvakrsquos conviction on false statement charges and vacated his conviction on securities fraud charges58 The panel held that the trial court abused its discretion when it excluded critical expert testimony regarding pricing in the bond market which could have bolstered Litvakrsquos arguments that his allegedly false statements were not material The panel only vacated Litvakrsquos securities fraud conviction however rejecting his central argument that the statements at issue were immaterial as a matter of law The SEC had brought a parallel civil action against Litvak arising out of the same

allegations which remains on hold pending the outcome of Litvakrsquos criminal case59

The panelrsquos decision was not a complete win for Litvak and could have broad implications for future SEC actions Litvakrsquos central defense at trial and on appeal was that his alleged misrepresentations which related to the profit he stood to make from counterparties on bond transactions were immaterial as a matter of law Specifically he argued that the statements were immaterial as a matter of law because they related to how much Litvak paid for the securities himself and had no impact on the value of the securities themselves Put another way Litvak argued that counterparties could not have considered his false statements important because they did not pertain to any objective valuation of the underlying securities

The panel rejected Litvakrsquos arguments pointing to testimony from Litvakrsquos counterparties who stated that Litvakrsquos alleged misstatements were ldquoimportantrdquo to them and that the counterparties were injured by those misrepresentations by ultimately paying more than they would otherwise have bid for the securities Even though Litvak had credibly argued that the kind of statements at issue were a common business practice that should have had no relevance to pricing the panel concluded the testimony precluded a finding that no reasonable mind could find Litvakrsquos statements material And although the decision was not written as though it broke new ground the panelrsquos approach to materiality and deference to what investors considered to be important may have a lasting impact on the way the SEC pursues investigations by putting a greater focus on gathering evidence concerning investorsrsquo expectations At the same time the courtrsquos decision that excluding Litvakrsquos proffered materiality expert was an abuse of discretion will ensure that future defendants have more leeway to argue their positions in court

In sum while the district court cannot dismiss the remaining charges against Litvak on materiality grounds Litvak will have much more ammunition to fight these charges at trial And for future defendants (in both criminal and SEC actions) this opinion is a stark reminder that questions of materiality are highly fact-specific and that no misrepresentation should be presumed to be harmless or immune from prosecution

Securities Enforcement 2015 Year-End Review Page 13

IV Selected Significant Investigations and Cases

Below we highlight some of the more notable SEC enforcement actions from the latter half of 2015

A Investment Advisers

The SEC continued its especially vigorous oversight of investment advisers in 2015 It brought enforcement actions focused on representations of investment risk and performance disclosure of conflicts of interest the Custody and Compliance Rules of the Advisers Act and disclosure of fees and expenses while signaling a particularly increased focus on private equity

1 Misrepresentation of Investment Risk and Performance

On July 31 2015 the SEC filed a settled AP against a financial advisory firm and its founder Walter F Grenda Jr The SEC alleged that Grenda made false and misleading statements to the firmrsquos advisory clients in recommending and selling investments in a hedge fund called Prestige Wealth Management Fund LP (Prestige Fund) Grendarsquos statements allegedly misled clients into believing that the investments were less risky than they actually were Grenda also allegedly borrowed $175000 from two of his clients which the SEC claimed he misrepresented would be for business purposes but which he spent on personal expenses and debts In its settlement order the SEC found that the advisory firm and Grenda violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder The SEC also found that the advisory firm and Grenda violated Sections 206(1) and 206(2) of the Advisers Act and that Grenda willfully aided and abetted Prestige Fundrsquos violations of Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder The advisory firm was censured by the Commission and had its registration as an investment adviser revoked but did not pay any financial penalties Without admitting or denying wrongdoing Grenda agreed to pay $7741091 consisting of a $50000 civil monetary penalty and $2241091 in disgorgement and prejudgment interest60

On August 4 2015 the SEC instituted a settled AP against Gold Mountain LLC an investment adviser in Iowa and its founder Gregory Bied for allegedly defrauding investors through false statements in quarterly reports

Allegedly Gold Mountain and Bied made false statements from 2012 through mid-2014 to investors in a hedge fund managed by Gold Mountain namely that the fund was achieving positive quarterly returns when in fact the hedge fund had lost around 75 of its value over that time The SEC claimed that Gold Mountain and Bied violated Sections 9(b) and 206(4) of the Advisers Act Without admitting or denying the SECrsquos findings Gold Mountain and Bied consented to an industry bar and to pay a civil monetary penalty of $200000 which will be distributed to investors61

On November 30 2015 the SEC instituted settled APs against investment adviser Alpha Fiduciary Inc (AFI) Arthur Doglione AFIrsquos majority owner and president and Michael Shea AFIrsquos vice president and business development director The SEC alleged that AFIrsquos executive summaries firm profiles presentations and advertising materials contained certain hypothetical performance information but did not disclose that this data was completely hypothetical Moreover the SEC claimed that while some of AFIrsquos materials contained disclosure language the disclosure language did not appear on the same page as the hypothetical performance data rendering it misleading The SEC also found that although AFIrsquos compliance and procedures manual required the chief compliance officerrsquos prior review and approval of any marketing materials Doglione had exercised sole authority over AFIrsquos policies and procedures Thus the SEC alleged that he was solely responsible for the review and approval of AFIrsquos marketing materials prior to their distribution to clients or prospective clients The SEC also claimed that Shea knew that some of the data was hypothetical yet still included this information in materials he sent to clients Moreover Shea allegedly provided prospective clients with a report of an existing clientrsquos portfolio which represented a 144 return without taking any steps to determine if it was representative of the performance of other AFI clients The SEC claimed that AFI Doglione and Shea violated Sections 206(2) and 206(4) of the Advisers Act As part of the settlement the parties without admitting or denying the Commissionrsquos findings agreed to censures and a total of $550000 in penalties AFI agreed to pay a civil monetary penalty of $250000 to notify existing and prospective clients of the SECrsquos order and to obtain an independent compliance consultant Doglione agreed to a civil monetary penalty of $250000 and Shea agreed to a civil monetary penalty of $2500062

Securities Enforcement 2015 Year-End Review Page 14

2 Conflicts of Interest

On July 24 2015 the SEC instituted a settled AP against investment adviser Dion Money Management LLC (Dion) for allegedly failing to disclose adequately to clients a compensation arrangement whereby Dion received payments from third parties when client assets were invested in certain mutual funds The SEC asserted that although Dion disclosed the conflict of interest it understated the maximum payment rate under the arrangements with third parties and omitted the possibility that investors would receive payments from multiple parties based on the same client assets The SEC found that Dion violated Sections 206(2) and 207 of the Advisers Act Without admitting or denying the SECrsquos findings Dion agreed to amend its disclosures to provide notice to its clients of the SECrsquos order and pay a civil monetary penalty of $50000 63

On August 6 2015 the SEC instituted a settled AP against Tri-Star Advisors (TSA) TSA CEO William T Payne and TSA president Jon C Vaughan for alleged violations of the Advisers Act The SEC alleged that TSA made investment recommendations to its clients and executed trades while charging clients a sales credit ie a percentage mark-up without disclosing the credit to clients Payne and Vaughan allegedly received 55 of the sales credit generated by each trade The SEC claimed that TSA violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and that Payne and Vaughan caused TSA to violate Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the Commissionrsquos findings the respondents agreed to pay $779149 to settle the SECrsquos claims TSA agreed to pay a $150000 civil monetary penalty Payne agreed to pay disgorgement of $142500 prejudgment interest of $323521 and a civil monetary penalty of $19563521 and Vaughan agreed to pay disgorgement of $232500 prejudgment interest of $527850 and a civil monetary penalty of $5000064

On August 10 2015 the SEC instituted a settled AP against an investment management company for allegedly failing to disclose a conflict The SEC claimed that an advisory client made a $50 million loan to a senior executive which the SEC claimed allowed the executive to personally participate in an acquisition led by the management companyrsquos parent Allegedly the management company subsequently invested certain other clientsrsquo funds in two transactions in which the advisory client had invested on different terms The SEC asserted

that the management company thus breached its fiduciary duty by failing to disclose the potential conflict of interest to both sets of clients The SEC also alleged that the management company violated the Advisers Act by inadvertently billing a client approximately $65 million in asset management fees on non-managed assets by inaccurately coding the non-managed assets Finally the SEC alleged that the management company failed to implement certain compliance policies and procedures enforce its code of ethics and maintain required books and records The SEC found that the management company violated Sections 206(2) 206(4) 204(a) and 204A of the Advisers Act and Rules 206(4)-7 204-2(a)(3) 204-2(a)(5) and 204A-1 thereunder The management company agreed to pay a $20 million penalty without admitting or denying the Commissionrsquos findings65

Also on September 29 2015 the SEC filed a complaint in federal court against Lee D Weiss and his investment advisory firm Family Endowment Partners LP (FEP) for allegedly misappropriating investments and concealing conflicts of interest Weiss and FEP allegedly advised their clients to make investments in companies Weiss owned and controlled without telling the clients of their relationship to the companies The SEC claimed that Weiss and FEP then used the investment funds to pay FEPrsquos financial obligations and delinquent interest owed to other clients The SEC further claimed Weiss and FEP advised clients to invest approximately $5 million in a portfolio of consumer loans with a company that offered to pay an annual return of 18 but Weiss structured the investments so his clients received only 9 while he pocketed the remaining 9 The SEC claimed that Weiss and FEP violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Sections 206(1) 206(2) 206(3) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and Section 204(b)(5) of the Advisers Act and Rule 204-1 thereunder The SEC is seeking disgorgement from Weiss FEB and several companies owned by Weiss66 The action is ongoing

On September 30 2015 the SEC settled claims against Focus Media Holding Ltd (Focus) a China-based advertising company and its founder Jason Jiang The SEC alleged Focus and Jiang failed to adequately disclose the partial sale of securities of Focusrsquos wholly owned subsidiary Allyes Online Media Holdings Ltd (Allyes) to certain Allyes and Focus insiders before the securities

Securities Enforcement 2015 Year-End Review Page 15

were sold to a private equity firm Allegedly the securities were sold to the private equity firm at approximately six times the price the insiders had paid for the securities The SEC alleged that the failure to disclose the sales to insiders violated the reporting and antifraud provisions of the federal securities laws Without admitting or denying the SECrsquos allegations Focus agreed to pay a civil monetary penalty of $346 million and Jiang agreed to pay a civil monetary penalty of $969 million disgorgement of $9690000 and prejudgment interest of $164786567

On October 16 2015 the SEC filed a civil injunctive action in federal court in the District of Colorado against Donald J Lester and his private equity firm alleging violations of the federal securities laws The SEC alleged that starting in January 2010 and continuing for five years Lester and his firm sold unregistered securities in two investment funds they managed CFI Fund LLC (CFI) and NuPower LLC (NuPower) raising approximately $10 million The SEC further alleged that the funds acted as unregistered investment companies and neither Lester nor his firm were registered as brokers or associated with registered brokers while trading in securities Additionally Lester purportedly devised a fraudulent scheme to use $28 million of CFI investment funds to meet his firmrsquos repayment obligation to a group of investment funds called Equity Edge that Lesterrsquos firm guaranteed Specifically the SEC alleged that Lesterrsquos firm transferred NuPower to Equity Edge for no consideration after which CFI purchased a 50 interest in NuPower from Equity Edge for $28 million CFIrsquos investors allegedly were not informed about the conflict of interest in the transaction or about the purchase The SEC is seeking among other relief permanent injunctions civil monetary penalties and disgorgement with prejudgment interest68 The action is pending

On June 29 2015 the SEC filed a settled AP against Welhouse amp Associates Inc (WAI) a state-registered investment adviser and its owner principal and CCO Mark Welhouse for an alleged ldquocherry-pickingrdquo scheme which purportedly violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act According to the SEC from February 2010 until January 2013 Welhouse and his firm allocated options trades in an SampP 500 exchange traded fund in a manner that violated his fiduciary duty Specifically the SEC claims that Welhouse disproportionately allocated profitable trades to his

personal and business accounts and allocated unprofitable trades to his advisory clients Welhouse allegedly made this unfair allocation through purchasing options in an omnibus account and delaying allocation of the purchases until after the value of the trades could be determined Without admitting or denying the SECrsquos findings Welhouse and WAI agreed to jointly and severally pay disgorgement of $418141 prejudgment interest of $5091860 and a $300000 civil monetary penalty In addition WAI was censured and Welhouse was barred from the securities industry69

3 Custody and Compliance Rules of the Advisers Act

On August 6 2015 the SEC instituted a settled AP against Reid S Johnson founder sole owner president and managing director of The Planning Group of Scottsdale LLC (TPGS) an Arizona-based investment adviser for allegedly aiding and abetting violations of Rules 206(4)-2 (the Custody Rule) and 206(4)-7 (the Compliance Rule) under the Advisers Act The Custody Rule imposes detailed requirements governing the manner in which a SEC-registered investment adviser must hold client assets and related obligations The Compliance Rule requires registered investment advisers to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act by the adviser and any of its supervised persons

The SEC alleged that TPGS violated the Custody Rule by failing to accurately determine the securities over which it had custody and by failing to ensure that the securities were maintained by a qualified custodian The SEC also charged that TPGS violated the Compliance Rule by failing to maintain an adequate compliance manual because TPGSrsquos compliance manual did not address the 2009 amendments to the custody rule Finally the SEC charged that TPGS and Johnson willfully made materially false representations in TPGSrsquos Forms ADV from 2010 through 201270 The action is ongoing

On August 6 2015 the SEC instituted a settled AP against a Texas-based investment advisory firm its sole owner and manager John P Bott and its former Chief Compliance Officer F Robert Falkenberg for allegedly violating the principal transaction prohibitions and Custody and Compliance Rules under the Advisers Act The SEC claimed that the investment advisory firm failed to provide any prior written disclosure or obtain consent from clients for at least 2000 securities transactions and

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 9

trading and encouraged Martoma to talk to a doctor about nonpublic drug trial results to inform trading decisions

To settle the SECrsquos claims Cohen without admitting or denying wrongdoing agreed to retain an independent consultant to conduct periodic reviews of his family office firms to subject his firms to periodic SEC examinations and to be barred from supervising funds that manage outside money for two years The settlement allows the SEC to extend the time period during which Cohen must comply with these requirements in the event the Commission brings a new action against Cohen and requires any registered broker-dealer or investment advisor that retains Cohen in a supervisory capacity before 2020 to retain an independent consultant until the end of 201944

The SECrsquos AP against Cohen was perhaps the most anticipated AP in recent years and its sudden and surprising settlement which did not include a monetary penalty suggests that the Commission may have had serious concerns about its case in the wake of Newman

The continuing impact of Newman is now an open question in light of the Supreme Courtrsquos grant of certiorari in Salman The question as to which the Supreme Court granted certiorari in Salman is whether the personal benefit to the insider that is necessary to establish insider trading requires proof of an exchange that is ldquoobjective consequential and represents at least a potential gain of a pecuniary or similarly valuable naturerdquo as the Second Circuit held in Newman45 The Ninth Circuitrsquos opinion in Salman written by SDNY Judge Jed Rakoff (sitting by designation) can be easily distinguished from Newman on its facts as it did not involve a remote tippee who lacked knowledge of any personal relationship between the insider and immediate tippee and because the personal relationship between tipper and tippee appeared to be far more meaningful than in Newman 46 Nevertheless the Supreme Courtrsquos decision may reach more broadly than the facts of either case to bring some clarity to insider trading law which could be a welcome development by all A decision in Salman is expected by the end of the Supreme Courtrsquos current term in June 2016

H Focus on Compliance Officers

The SECrsquos pursuit of enforcement actions against compliance professionals was one of the most divisive issues of 2015 As we reported in our Mid-Year Review after having typically limited enforcement actions against individuals with compliance authority to those who also had other management responsibilities or in cases of actual fraud the SEC brought claims in the first half of 2015 against individuals responsible solely for compliance and in the context of their compliance roles This sparked public statements of dissent and criticism from Commissioner Gallagher Commissioner Aguilar responded with a statement addressing the criticism and reassuring compliance professionals that the SEC was not interested in bringing enforcement actions against compliance professionals who were obeying the law and fulfilling their responsibilities Chair White added her voice to the debate on July 14 2015 assuring compliance professionals that ldquo[w]e do not bring cases based on second guessing compliance officersrsquo good faith judgments but rather when their actions or inactions cross a clear line that deserve sanctionrdquo47 And on November 4 2015 Enforcement Director Ceresney attempting to assuage the fears of compliance officers who worry they will be targeted reiterated that the overwhelming majority of the cases the SEC brings involve compliance officers who crossed a clear line by engaging in affirmative misconduct or obstructing regulators48

On August 5 2015 in an action illustrative of the types of acts that appear to result in enforcement actions against compliance officers ALJ Cameron Elliot found that Judy Wolf a former investment bank compliance officer aided and abetted her employerrsquos violation of the books and records provisions of the Exchange Act by altering documents during an SEC investigation After learning that the SEC was investigating Wolf admitted to altering her notes regarding a review of securities trades in a fast food chain restaurantrsquos stock that she did not flag for her superiors by including reports of takeover rumors that would have bolstered a conclusion that the trades were improper Although ALJ Elliot found that Wolf violated the Exchange Act he declined to sanction her because among other things he concluded that her violations were isolated and not egregious ALJ Elliot noted that some factors favored sanctions but held that Wolf was a low-level employee and sanctions would allow her employer to label her a ldquobad applerdquo and move on without examining its practices ALJ Elliot further alluded to the

Securities Enforcement 2015 Year-End Review Page 10

ongoing debate over the Commissionrsquos policy of bringing actions against compliance personnel by noting that sanctioning low-hanging fruit like Wolf could discourage competent persons from taking compliance positions49

On August 6 2015 the SEC agreed to settle claims it had brought against an investment advisory firm its CEO John P Bott II and its chief compliance officer Robert Falkenberg50 In March 2011 the SEC asked Falkenberg to provide copies of his 2010 review of the firmrsquos policies and procedures which Falkenberg allegedly told the Commission that he had conducted in February 2011 A review of the firmrsquos metadata however allegedly revealed that Falkenberg had not actually conducted his review until April 2011 and had only spent a few hours drafting his report which he never sent to the firmrsquos CEO The SEC claimed the firm had violated Sections 206(3) 206(4) and 206(4)(A) of the Investment Advisers Act of 1940 (the Advisers Act) and Rules 206(4)-2 206(4)-7 and 206(4)A-1 thereunder and that Bott and Falkenberg had aided and abetted the firmrsquos violations Pursuant to the settlement Bott agreed to pay $450000 in disgorgement to the firmrsquos clients plus prejudgment interest and Bott Falkenberg and the firm were ordered to pay civil monetary penalties in the amounts of $70000 $40000 and $200000 respectively for a total of more than $760000 Falkenberg was also required to complete 30 hours of compliance training for his alleged failure to monitor the firm by conducting an annual review of its policies and procedures

In addition to its recent actions involving compliance officers the SEC has been scrutinizing investment advisersrsquo growing use of outside CCOs For example on November 9 2015 OCIE released a report finding that several outsourced CCOs had not effectively implemented compliance programs for which they were responsible51 In its risk alert OCIE reported that ldquocertain outsourced CCOs could not articulate the business or compliance risksrdquo their firms faced or whether the firms had adopted written policies and procedures to mitigate those risks52 In other instances outside CCOs were not tailoring program templates to the adviserrsquos business meaning that the compliance materials were not applicable to the firm The SEC concluded that advisers with outsourced CCOs should review their business practices to ensure that CCOs have enough authority to implement compliance programs and policies

Even if the SEC follows through with its assurances that only compliance officers who cross a ldquoclear linerdquo will face

enforcement action the number of regulatory lines now drawn for compliance officers mdash and their new focus on outsourced compliance programs mdash makes it clear that this remains an area of heightened enforcement risk

III Selected Judicial Developments Several judicial opinions of significance to the SECrsquos enforcement program were issued in the second half of 2015 and we summarize four of the most significant opinions below First the DC Circuit held that the SEC could not retroactively apply the remedial provisions of Dodd-Frank concerning industry bars to punish conduct that occurred before Dodd-Frank was enacted Second the DC Circuit in a separate case held that Section 4E of the Exchange Act does not set a limitation period for the SEC to bring an enforcement action after issuing a Wells notice Third the Second Circuit issued a long-awaited decision in an appeal of a securities fraud conviction in Litvak that while coming in a criminal case will likely allow the SEC to continue to push the envelope for what constitutes a material misstatement Finally Judge Pauley of the SDNY criticized the SEC for its use of an asset freeze in connection with the collapse of a Cayman Islands bank

A Koch v SEC

On July 14 2015 the DC Circuit ruled in Koch v SEC that the SEC could not use remedial provisions of Dodd-Frank to punish an investment adviser for conduct that occurred before Dodd-Frank was enacted53 The SEC had instituted an AP against Donald Koch and his firm Koch Asset Management (KAM) alleging that Koch engaged in a scheme to manipulate the prices of stocks in which KAM had invested Koch purportedly instructed his broker on two different occasions in 2009 to increase the frequency of the brokerrsquos bids on stocks at the end of the trading day which had the effect of inflating the stocksrsquo prices The SEC alleged that Koch and KAM violated Section 10(b) of the Exchange Act and Section 206(1) of the Investment Company Act and requested among other things that Koch be barred from the securities industry

Prior to Dodd-Frank the SEC had the authority to bar individuals from associating with a subset of securities industry participants including broker-dealers and investment advisers Dodd-Frank however expanded the SECrsquos authority to bar individuals from associating with municipal advisors and ratings organizations a power it did not have prior to the passage of Dodd-Frank

Securities Enforcement 2015 Year-End Review Page 11

Although Kochrsquos alleged market manipulation occurred in 2009 a year before Dodd-Frank the SEC sought to bar Koch from the securities industry pursuant to its authority under Dodd-Frank

The presiding ALJ found that Koch engaged in market manipulation but only imposed a limited industry bar that barred Koch from associating with investment advisers Koch appealed to the Commission which not only affirmed the ALJrsquos findings but also expanded the industry bar imposed on Koch to include municipal advisers and ratings organizations Koch appealed the Commissionrsquos ruling to the DC Circuit which also affirmed that Koch had engaged in market manipulation but reversed the Commissionrsquos expansion of Kochrsquos industry bar The panel held that the SEC could not use Dodd-Frank to penalize Koch for conduct that occurred before the statute was enacted because Dodd-Frank did not expressly allow the SEC to apply its provisions retroactively and expanding Kochrsquos industry bar would ldquowould impair rights [Koch] possessed when he acted increase [Kochrsquos] liability for past conduct or impose new duties with respect to transactions already completedrdquo

A week after the DC Circuit ruled Commissioners Gallagher and Piwowar who had dissented from the SECrsquos order expanding Kochrsquos industry bar said in a joint statement that they were ldquopleasedrdquo with the courtrsquos holding and urged the SEC to address ldquoall impermissibly retroactive collateral bars that have been misapplied since the enactment of Dodd-Frankrdquo54

B Montford v SEC

On July 21 2015 the DC Circuit issued its opinion in Montford v SEC holding that the requirement under Section 4E of the Exchange Act that enforcement proceedings be brought within 180 days of a Wells notice (enacted with Dodd Frank) is not an enforceable jurisdictional requirement 55 Montford arose from an appeal of a final order from the Commission finding that respondents violated Sections 204 206 and 207 of the Advisors Act for among other things allegedly failing to disclose the receipt of fees from an investment manager while disclosing to customers that it was ldquoindependentrdquo and ldquoconflict freerdquo The Commission barred respondents from the securities industry required the disgorgement of $210000 and imposed civil penalties56

Respondents appealed the Commissionrsquos order to the DC Circuit raising two challenges each of which the court rejected First respondents argued that the institution of administrative proceedings more than 180 days after issuing a Wells notice violated Section 4E of the Exchange Act and required dismissal Section 4E of the Exchange Act provides that ldquo[n]ot later than 180 days after the date on which Commission staff provide a written Wells notification to any person the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent not to file an actionrdquo The deadline of Section 4E may be extended by the Director of the Division of Enforcement ldquofor certain complex actionsrdquo which the Commission submitted happened in the instant case 57 Without reaching the issue of whether the Commission properly extended the Section 4E deadline the court found that Section 4E of the Exchange Act was ambiguous as to whether its violation served to bar an action by the Commission Accordingly the court concluded that under Chevron the Commissionrsquos interpretation that Section 4E is not a jurisdictional bar was entitled to deference as long as it was reasonable which the court found it was

Second respondents argued that the Commission abused its discretion in imposing civil penalties and ordering disgorgement because in respondentsrsquo view the receipt of money was not illegal and there was no causal link between the Commissionrsquos order of penalties and disgorgement and the alleged nondisclosure The court rejected this argument too noting that the Commission has flexibility in imposing such penalties which will be upheld as long as they are reasonable

Because the Enforcement Division is generally diligent about ensuring that enforcement actions are filed within 180 days of a Wells notice (or seeking an extension from the Division Director) Montford may have limited practical impact More surprising is arguably the judicial finding of ambiguity in a statute that left little room for interpretation

C SEC v Caledonian Bank

On November 10 2015 in SEC v Caledonian Bank Judge William H Pauley III of the Southern District of New York denied the defendantsrsquo motion to dismiss an SEC complaint that defendants had engaged in unregistered sales of securities in violation of Sections 5(a) and 5(c) of the Securities Act as part of an alleged

Securities Enforcement 2015 Year-End Review Page 12

penny stock ldquopump-and-dumprdquo scheme that the SEC claimed netted them profits of $75 million According to the SEC the defendants allegedly aggressively marketed the stocks of four companies that contained few assets using a series of sham transactions to conceal beneficial ownership of the securities before offering them to the public The opinion on a motion to dismiss would likely be of limited interest if only considered for its holding

In declining to dismiss the pending case however Judge William H Pauley III aggressively criticized the SECrsquos failure to coordinate its enforcement efforts which he stated led to unintended consequences and collateral victims According to the courtrsquos opinion at the same time a team of Washington DC-based SEC attorneys had persuaded Judge Pauley in February 2015 to freeze the assets of a Cayman Islands bank that allegedly sold the fraudulent securities another team of New York-based SEC attorneys who were investigating the some of the same defendants had information showing that the bank had not sold the securities for its own account but merely acted as a broker According to the Judge Pauley the freeze order (which was predicated in part on the belief that the bank had not acted as a broker) had the effect of bankrupting the bank shortly thereafter Judge Pauley blamed the SECrsquos ldquobureaucratic siloingrdquo for causing what he described as an unfortunate and unnecessary outcome In a broader criticism of the SEC Judge Pauley stated ldquoit is hard to believe that those charged with overseeing enforcement are not monitoring activities to avoid needless duplication of effortrdquo and that ldquo[g]iven the high stakes in securities enforcement actions and in the face of a workload the SEC describes as an lsquooverwhelming burdenrsquo a self-examination may be appropriaterdquo It remains to be seen what impact the criticism will have

D United States v Litvak

On December 8 2015 in a highly anticipated ruling the United States Court of Appeals for the Second Circuit reversed bond trader Jesse Litvakrsquos conviction on false statement charges and vacated his conviction on securities fraud charges58 The panel held that the trial court abused its discretion when it excluded critical expert testimony regarding pricing in the bond market which could have bolstered Litvakrsquos arguments that his allegedly false statements were not material The panel only vacated Litvakrsquos securities fraud conviction however rejecting his central argument that the statements at issue were immaterial as a matter of law The SEC had brought a parallel civil action against Litvak arising out of the same

allegations which remains on hold pending the outcome of Litvakrsquos criminal case59

The panelrsquos decision was not a complete win for Litvak and could have broad implications for future SEC actions Litvakrsquos central defense at trial and on appeal was that his alleged misrepresentations which related to the profit he stood to make from counterparties on bond transactions were immaterial as a matter of law Specifically he argued that the statements were immaterial as a matter of law because they related to how much Litvak paid for the securities himself and had no impact on the value of the securities themselves Put another way Litvak argued that counterparties could not have considered his false statements important because they did not pertain to any objective valuation of the underlying securities

The panel rejected Litvakrsquos arguments pointing to testimony from Litvakrsquos counterparties who stated that Litvakrsquos alleged misstatements were ldquoimportantrdquo to them and that the counterparties were injured by those misrepresentations by ultimately paying more than they would otherwise have bid for the securities Even though Litvak had credibly argued that the kind of statements at issue were a common business practice that should have had no relevance to pricing the panel concluded the testimony precluded a finding that no reasonable mind could find Litvakrsquos statements material And although the decision was not written as though it broke new ground the panelrsquos approach to materiality and deference to what investors considered to be important may have a lasting impact on the way the SEC pursues investigations by putting a greater focus on gathering evidence concerning investorsrsquo expectations At the same time the courtrsquos decision that excluding Litvakrsquos proffered materiality expert was an abuse of discretion will ensure that future defendants have more leeway to argue their positions in court

In sum while the district court cannot dismiss the remaining charges against Litvak on materiality grounds Litvak will have much more ammunition to fight these charges at trial And for future defendants (in both criminal and SEC actions) this opinion is a stark reminder that questions of materiality are highly fact-specific and that no misrepresentation should be presumed to be harmless or immune from prosecution

Securities Enforcement 2015 Year-End Review Page 13

IV Selected Significant Investigations and Cases

Below we highlight some of the more notable SEC enforcement actions from the latter half of 2015

A Investment Advisers

The SEC continued its especially vigorous oversight of investment advisers in 2015 It brought enforcement actions focused on representations of investment risk and performance disclosure of conflicts of interest the Custody and Compliance Rules of the Advisers Act and disclosure of fees and expenses while signaling a particularly increased focus on private equity

1 Misrepresentation of Investment Risk and Performance

On July 31 2015 the SEC filed a settled AP against a financial advisory firm and its founder Walter F Grenda Jr The SEC alleged that Grenda made false and misleading statements to the firmrsquos advisory clients in recommending and selling investments in a hedge fund called Prestige Wealth Management Fund LP (Prestige Fund) Grendarsquos statements allegedly misled clients into believing that the investments were less risky than they actually were Grenda also allegedly borrowed $175000 from two of his clients which the SEC claimed he misrepresented would be for business purposes but which he spent on personal expenses and debts In its settlement order the SEC found that the advisory firm and Grenda violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder The SEC also found that the advisory firm and Grenda violated Sections 206(1) and 206(2) of the Advisers Act and that Grenda willfully aided and abetted Prestige Fundrsquos violations of Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder The advisory firm was censured by the Commission and had its registration as an investment adviser revoked but did not pay any financial penalties Without admitting or denying wrongdoing Grenda agreed to pay $7741091 consisting of a $50000 civil monetary penalty and $2241091 in disgorgement and prejudgment interest60

On August 4 2015 the SEC instituted a settled AP against Gold Mountain LLC an investment adviser in Iowa and its founder Gregory Bied for allegedly defrauding investors through false statements in quarterly reports

Allegedly Gold Mountain and Bied made false statements from 2012 through mid-2014 to investors in a hedge fund managed by Gold Mountain namely that the fund was achieving positive quarterly returns when in fact the hedge fund had lost around 75 of its value over that time The SEC claimed that Gold Mountain and Bied violated Sections 9(b) and 206(4) of the Advisers Act Without admitting or denying the SECrsquos findings Gold Mountain and Bied consented to an industry bar and to pay a civil monetary penalty of $200000 which will be distributed to investors61

On November 30 2015 the SEC instituted settled APs against investment adviser Alpha Fiduciary Inc (AFI) Arthur Doglione AFIrsquos majority owner and president and Michael Shea AFIrsquos vice president and business development director The SEC alleged that AFIrsquos executive summaries firm profiles presentations and advertising materials contained certain hypothetical performance information but did not disclose that this data was completely hypothetical Moreover the SEC claimed that while some of AFIrsquos materials contained disclosure language the disclosure language did not appear on the same page as the hypothetical performance data rendering it misleading The SEC also found that although AFIrsquos compliance and procedures manual required the chief compliance officerrsquos prior review and approval of any marketing materials Doglione had exercised sole authority over AFIrsquos policies and procedures Thus the SEC alleged that he was solely responsible for the review and approval of AFIrsquos marketing materials prior to their distribution to clients or prospective clients The SEC also claimed that Shea knew that some of the data was hypothetical yet still included this information in materials he sent to clients Moreover Shea allegedly provided prospective clients with a report of an existing clientrsquos portfolio which represented a 144 return without taking any steps to determine if it was representative of the performance of other AFI clients The SEC claimed that AFI Doglione and Shea violated Sections 206(2) and 206(4) of the Advisers Act As part of the settlement the parties without admitting or denying the Commissionrsquos findings agreed to censures and a total of $550000 in penalties AFI agreed to pay a civil monetary penalty of $250000 to notify existing and prospective clients of the SECrsquos order and to obtain an independent compliance consultant Doglione agreed to a civil monetary penalty of $250000 and Shea agreed to a civil monetary penalty of $2500062

Securities Enforcement 2015 Year-End Review Page 14

2 Conflicts of Interest

On July 24 2015 the SEC instituted a settled AP against investment adviser Dion Money Management LLC (Dion) for allegedly failing to disclose adequately to clients a compensation arrangement whereby Dion received payments from third parties when client assets were invested in certain mutual funds The SEC asserted that although Dion disclosed the conflict of interest it understated the maximum payment rate under the arrangements with third parties and omitted the possibility that investors would receive payments from multiple parties based on the same client assets The SEC found that Dion violated Sections 206(2) and 207 of the Advisers Act Without admitting or denying the SECrsquos findings Dion agreed to amend its disclosures to provide notice to its clients of the SECrsquos order and pay a civil monetary penalty of $50000 63

On August 6 2015 the SEC instituted a settled AP against Tri-Star Advisors (TSA) TSA CEO William T Payne and TSA president Jon C Vaughan for alleged violations of the Advisers Act The SEC alleged that TSA made investment recommendations to its clients and executed trades while charging clients a sales credit ie a percentage mark-up without disclosing the credit to clients Payne and Vaughan allegedly received 55 of the sales credit generated by each trade The SEC claimed that TSA violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and that Payne and Vaughan caused TSA to violate Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the Commissionrsquos findings the respondents agreed to pay $779149 to settle the SECrsquos claims TSA agreed to pay a $150000 civil monetary penalty Payne agreed to pay disgorgement of $142500 prejudgment interest of $323521 and a civil monetary penalty of $19563521 and Vaughan agreed to pay disgorgement of $232500 prejudgment interest of $527850 and a civil monetary penalty of $5000064

On August 10 2015 the SEC instituted a settled AP against an investment management company for allegedly failing to disclose a conflict The SEC claimed that an advisory client made a $50 million loan to a senior executive which the SEC claimed allowed the executive to personally participate in an acquisition led by the management companyrsquos parent Allegedly the management company subsequently invested certain other clientsrsquo funds in two transactions in which the advisory client had invested on different terms The SEC asserted

that the management company thus breached its fiduciary duty by failing to disclose the potential conflict of interest to both sets of clients The SEC also alleged that the management company violated the Advisers Act by inadvertently billing a client approximately $65 million in asset management fees on non-managed assets by inaccurately coding the non-managed assets Finally the SEC alleged that the management company failed to implement certain compliance policies and procedures enforce its code of ethics and maintain required books and records The SEC found that the management company violated Sections 206(2) 206(4) 204(a) and 204A of the Advisers Act and Rules 206(4)-7 204-2(a)(3) 204-2(a)(5) and 204A-1 thereunder The management company agreed to pay a $20 million penalty without admitting or denying the Commissionrsquos findings65

Also on September 29 2015 the SEC filed a complaint in federal court against Lee D Weiss and his investment advisory firm Family Endowment Partners LP (FEP) for allegedly misappropriating investments and concealing conflicts of interest Weiss and FEP allegedly advised their clients to make investments in companies Weiss owned and controlled without telling the clients of their relationship to the companies The SEC claimed that Weiss and FEP then used the investment funds to pay FEPrsquos financial obligations and delinquent interest owed to other clients The SEC further claimed Weiss and FEP advised clients to invest approximately $5 million in a portfolio of consumer loans with a company that offered to pay an annual return of 18 but Weiss structured the investments so his clients received only 9 while he pocketed the remaining 9 The SEC claimed that Weiss and FEP violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Sections 206(1) 206(2) 206(3) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and Section 204(b)(5) of the Advisers Act and Rule 204-1 thereunder The SEC is seeking disgorgement from Weiss FEB and several companies owned by Weiss66 The action is ongoing

On September 30 2015 the SEC settled claims against Focus Media Holding Ltd (Focus) a China-based advertising company and its founder Jason Jiang The SEC alleged Focus and Jiang failed to adequately disclose the partial sale of securities of Focusrsquos wholly owned subsidiary Allyes Online Media Holdings Ltd (Allyes) to certain Allyes and Focus insiders before the securities

Securities Enforcement 2015 Year-End Review Page 15

were sold to a private equity firm Allegedly the securities were sold to the private equity firm at approximately six times the price the insiders had paid for the securities The SEC alleged that the failure to disclose the sales to insiders violated the reporting and antifraud provisions of the federal securities laws Without admitting or denying the SECrsquos allegations Focus agreed to pay a civil monetary penalty of $346 million and Jiang agreed to pay a civil monetary penalty of $969 million disgorgement of $9690000 and prejudgment interest of $164786567

On October 16 2015 the SEC filed a civil injunctive action in federal court in the District of Colorado against Donald J Lester and his private equity firm alleging violations of the federal securities laws The SEC alleged that starting in January 2010 and continuing for five years Lester and his firm sold unregistered securities in two investment funds they managed CFI Fund LLC (CFI) and NuPower LLC (NuPower) raising approximately $10 million The SEC further alleged that the funds acted as unregistered investment companies and neither Lester nor his firm were registered as brokers or associated with registered brokers while trading in securities Additionally Lester purportedly devised a fraudulent scheme to use $28 million of CFI investment funds to meet his firmrsquos repayment obligation to a group of investment funds called Equity Edge that Lesterrsquos firm guaranteed Specifically the SEC alleged that Lesterrsquos firm transferred NuPower to Equity Edge for no consideration after which CFI purchased a 50 interest in NuPower from Equity Edge for $28 million CFIrsquos investors allegedly were not informed about the conflict of interest in the transaction or about the purchase The SEC is seeking among other relief permanent injunctions civil monetary penalties and disgorgement with prejudgment interest68 The action is pending

On June 29 2015 the SEC filed a settled AP against Welhouse amp Associates Inc (WAI) a state-registered investment adviser and its owner principal and CCO Mark Welhouse for an alleged ldquocherry-pickingrdquo scheme which purportedly violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act According to the SEC from February 2010 until January 2013 Welhouse and his firm allocated options trades in an SampP 500 exchange traded fund in a manner that violated his fiduciary duty Specifically the SEC claims that Welhouse disproportionately allocated profitable trades to his

personal and business accounts and allocated unprofitable trades to his advisory clients Welhouse allegedly made this unfair allocation through purchasing options in an omnibus account and delaying allocation of the purchases until after the value of the trades could be determined Without admitting or denying the SECrsquos findings Welhouse and WAI agreed to jointly and severally pay disgorgement of $418141 prejudgment interest of $5091860 and a $300000 civil monetary penalty In addition WAI was censured and Welhouse was barred from the securities industry69

3 Custody and Compliance Rules of the Advisers Act

On August 6 2015 the SEC instituted a settled AP against Reid S Johnson founder sole owner president and managing director of The Planning Group of Scottsdale LLC (TPGS) an Arizona-based investment adviser for allegedly aiding and abetting violations of Rules 206(4)-2 (the Custody Rule) and 206(4)-7 (the Compliance Rule) under the Advisers Act The Custody Rule imposes detailed requirements governing the manner in which a SEC-registered investment adviser must hold client assets and related obligations The Compliance Rule requires registered investment advisers to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act by the adviser and any of its supervised persons

The SEC alleged that TPGS violated the Custody Rule by failing to accurately determine the securities over which it had custody and by failing to ensure that the securities were maintained by a qualified custodian The SEC also charged that TPGS violated the Compliance Rule by failing to maintain an adequate compliance manual because TPGSrsquos compliance manual did not address the 2009 amendments to the custody rule Finally the SEC charged that TPGS and Johnson willfully made materially false representations in TPGSrsquos Forms ADV from 2010 through 201270 The action is ongoing

On August 6 2015 the SEC instituted a settled AP against a Texas-based investment advisory firm its sole owner and manager John P Bott and its former Chief Compliance Officer F Robert Falkenberg for allegedly violating the principal transaction prohibitions and Custody and Compliance Rules under the Advisers Act The SEC claimed that the investment advisory firm failed to provide any prior written disclosure or obtain consent from clients for at least 2000 securities transactions and

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 10

ongoing debate over the Commissionrsquos policy of bringing actions against compliance personnel by noting that sanctioning low-hanging fruit like Wolf could discourage competent persons from taking compliance positions49

On August 6 2015 the SEC agreed to settle claims it had brought against an investment advisory firm its CEO John P Bott II and its chief compliance officer Robert Falkenberg50 In March 2011 the SEC asked Falkenberg to provide copies of his 2010 review of the firmrsquos policies and procedures which Falkenberg allegedly told the Commission that he had conducted in February 2011 A review of the firmrsquos metadata however allegedly revealed that Falkenberg had not actually conducted his review until April 2011 and had only spent a few hours drafting his report which he never sent to the firmrsquos CEO The SEC claimed the firm had violated Sections 206(3) 206(4) and 206(4)(A) of the Investment Advisers Act of 1940 (the Advisers Act) and Rules 206(4)-2 206(4)-7 and 206(4)A-1 thereunder and that Bott and Falkenberg had aided and abetted the firmrsquos violations Pursuant to the settlement Bott agreed to pay $450000 in disgorgement to the firmrsquos clients plus prejudgment interest and Bott Falkenberg and the firm were ordered to pay civil monetary penalties in the amounts of $70000 $40000 and $200000 respectively for a total of more than $760000 Falkenberg was also required to complete 30 hours of compliance training for his alleged failure to monitor the firm by conducting an annual review of its policies and procedures

In addition to its recent actions involving compliance officers the SEC has been scrutinizing investment advisersrsquo growing use of outside CCOs For example on November 9 2015 OCIE released a report finding that several outsourced CCOs had not effectively implemented compliance programs for which they were responsible51 In its risk alert OCIE reported that ldquocertain outsourced CCOs could not articulate the business or compliance risksrdquo their firms faced or whether the firms had adopted written policies and procedures to mitigate those risks52 In other instances outside CCOs were not tailoring program templates to the adviserrsquos business meaning that the compliance materials were not applicable to the firm The SEC concluded that advisers with outsourced CCOs should review their business practices to ensure that CCOs have enough authority to implement compliance programs and policies

Even if the SEC follows through with its assurances that only compliance officers who cross a ldquoclear linerdquo will face

enforcement action the number of regulatory lines now drawn for compliance officers mdash and their new focus on outsourced compliance programs mdash makes it clear that this remains an area of heightened enforcement risk

III Selected Judicial Developments Several judicial opinions of significance to the SECrsquos enforcement program were issued in the second half of 2015 and we summarize four of the most significant opinions below First the DC Circuit held that the SEC could not retroactively apply the remedial provisions of Dodd-Frank concerning industry bars to punish conduct that occurred before Dodd-Frank was enacted Second the DC Circuit in a separate case held that Section 4E of the Exchange Act does not set a limitation period for the SEC to bring an enforcement action after issuing a Wells notice Third the Second Circuit issued a long-awaited decision in an appeal of a securities fraud conviction in Litvak that while coming in a criminal case will likely allow the SEC to continue to push the envelope for what constitutes a material misstatement Finally Judge Pauley of the SDNY criticized the SEC for its use of an asset freeze in connection with the collapse of a Cayman Islands bank

A Koch v SEC

On July 14 2015 the DC Circuit ruled in Koch v SEC that the SEC could not use remedial provisions of Dodd-Frank to punish an investment adviser for conduct that occurred before Dodd-Frank was enacted53 The SEC had instituted an AP against Donald Koch and his firm Koch Asset Management (KAM) alleging that Koch engaged in a scheme to manipulate the prices of stocks in which KAM had invested Koch purportedly instructed his broker on two different occasions in 2009 to increase the frequency of the brokerrsquos bids on stocks at the end of the trading day which had the effect of inflating the stocksrsquo prices The SEC alleged that Koch and KAM violated Section 10(b) of the Exchange Act and Section 206(1) of the Investment Company Act and requested among other things that Koch be barred from the securities industry

Prior to Dodd-Frank the SEC had the authority to bar individuals from associating with a subset of securities industry participants including broker-dealers and investment advisers Dodd-Frank however expanded the SECrsquos authority to bar individuals from associating with municipal advisors and ratings organizations a power it did not have prior to the passage of Dodd-Frank

Securities Enforcement 2015 Year-End Review Page 11

Although Kochrsquos alleged market manipulation occurred in 2009 a year before Dodd-Frank the SEC sought to bar Koch from the securities industry pursuant to its authority under Dodd-Frank

The presiding ALJ found that Koch engaged in market manipulation but only imposed a limited industry bar that barred Koch from associating with investment advisers Koch appealed to the Commission which not only affirmed the ALJrsquos findings but also expanded the industry bar imposed on Koch to include municipal advisers and ratings organizations Koch appealed the Commissionrsquos ruling to the DC Circuit which also affirmed that Koch had engaged in market manipulation but reversed the Commissionrsquos expansion of Kochrsquos industry bar The panel held that the SEC could not use Dodd-Frank to penalize Koch for conduct that occurred before the statute was enacted because Dodd-Frank did not expressly allow the SEC to apply its provisions retroactively and expanding Kochrsquos industry bar would ldquowould impair rights [Koch] possessed when he acted increase [Kochrsquos] liability for past conduct or impose new duties with respect to transactions already completedrdquo

A week after the DC Circuit ruled Commissioners Gallagher and Piwowar who had dissented from the SECrsquos order expanding Kochrsquos industry bar said in a joint statement that they were ldquopleasedrdquo with the courtrsquos holding and urged the SEC to address ldquoall impermissibly retroactive collateral bars that have been misapplied since the enactment of Dodd-Frankrdquo54

B Montford v SEC

On July 21 2015 the DC Circuit issued its opinion in Montford v SEC holding that the requirement under Section 4E of the Exchange Act that enforcement proceedings be brought within 180 days of a Wells notice (enacted with Dodd Frank) is not an enforceable jurisdictional requirement 55 Montford arose from an appeal of a final order from the Commission finding that respondents violated Sections 204 206 and 207 of the Advisors Act for among other things allegedly failing to disclose the receipt of fees from an investment manager while disclosing to customers that it was ldquoindependentrdquo and ldquoconflict freerdquo The Commission barred respondents from the securities industry required the disgorgement of $210000 and imposed civil penalties56

Respondents appealed the Commissionrsquos order to the DC Circuit raising two challenges each of which the court rejected First respondents argued that the institution of administrative proceedings more than 180 days after issuing a Wells notice violated Section 4E of the Exchange Act and required dismissal Section 4E of the Exchange Act provides that ldquo[n]ot later than 180 days after the date on which Commission staff provide a written Wells notification to any person the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent not to file an actionrdquo The deadline of Section 4E may be extended by the Director of the Division of Enforcement ldquofor certain complex actionsrdquo which the Commission submitted happened in the instant case 57 Without reaching the issue of whether the Commission properly extended the Section 4E deadline the court found that Section 4E of the Exchange Act was ambiguous as to whether its violation served to bar an action by the Commission Accordingly the court concluded that under Chevron the Commissionrsquos interpretation that Section 4E is not a jurisdictional bar was entitled to deference as long as it was reasonable which the court found it was

Second respondents argued that the Commission abused its discretion in imposing civil penalties and ordering disgorgement because in respondentsrsquo view the receipt of money was not illegal and there was no causal link between the Commissionrsquos order of penalties and disgorgement and the alleged nondisclosure The court rejected this argument too noting that the Commission has flexibility in imposing such penalties which will be upheld as long as they are reasonable

Because the Enforcement Division is generally diligent about ensuring that enforcement actions are filed within 180 days of a Wells notice (or seeking an extension from the Division Director) Montford may have limited practical impact More surprising is arguably the judicial finding of ambiguity in a statute that left little room for interpretation

C SEC v Caledonian Bank

On November 10 2015 in SEC v Caledonian Bank Judge William H Pauley III of the Southern District of New York denied the defendantsrsquo motion to dismiss an SEC complaint that defendants had engaged in unregistered sales of securities in violation of Sections 5(a) and 5(c) of the Securities Act as part of an alleged

Securities Enforcement 2015 Year-End Review Page 12

penny stock ldquopump-and-dumprdquo scheme that the SEC claimed netted them profits of $75 million According to the SEC the defendants allegedly aggressively marketed the stocks of four companies that contained few assets using a series of sham transactions to conceal beneficial ownership of the securities before offering them to the public The opinion on a motion to dismiss would likely be of limited interest if only considered for its holding

In declining to dismiss the pending case however Judge William H Pauley III aggressively criticized the SECrsquos failure to coordinate its enforcement efforts which he stated led to unintended consequences and collateral victims According to the courtrsquos opinion at the same time a team of Washington DC-based SEC attorneys had persuaded Judge Pauley in February 2015 to freeze the assets of a Cayman Islands bank that allegedly sold the fraudulent securities another team of New York-based SEC attorneys who were investigating the some of the same defendants had information showing that the bank had not sold the securities for its own account but merely acted as a broker According to the Judge Pauley the freeze order (which was predicated in part on the belief that the bank had not acted as a broker) had the effect of bankrupting the bank shortly thereafter Judge Pauley blamed the SECrsquos ldquobureaucratic siloingrdquo for causing what he described as an unfortunate and unnecessary outcome In a broader criticism of the SEC Judge Pauley stated ldquoit is hard to believe that those charged with overseeing enforcement are not monitoring activities to avoid needless duplication of effortrdquo and that ldquo[g]iven the high stakes in securities enforcement actions and in the face of a workload the SEC describes as an lsquooverwhelming burdenrsquo a self-examination may be appropriaterdquo It remains to be seen what impact the criticism will have

D United States v Litvak

On December 8 2015 in a highly anticipated ruling the United States Court of Appeals for the Second Circuit reversed bond trader Jesse Litvakrsquos conviction on false statement charges and vacated his conviction on securities fraud charges58 The panel held that the trial court abused its discretion when it excluded critical expert testimony regarding pricing in the bond market which could have bolstered Litvakrsquos arguments that his allegedly false statements were not material The panel only vacated Litvakrsquos securities fraud conviction however rejecting his central argument that the statements at issue were immaterial as a matter of law The SEC had brought a parallel civil action against Litvak arising out of the same

allegations which remains on hold pending the outcome of Litvakrsquos criminal case59

The panelrsquos decision was not a complete win for Litvak and could have broad implications for future SEC actions Litvakrsquos central defense at trial and on appeal was that his alleged misrepresentations which related to the profit he stood to make from counterparties on bond transactions were immaterial as a matter of law Specifically he argued that the statements were immaterial as a matter of law because they related to how much Litvak paid for the securities himself and had no impact on the value of the securities themselves Put another way Litvak argued that counterparties could not have considered his false statements important because they did not pertain to any objective valuation of the underlying securities

The panel rejected Litvakrsquos arguments pointing to testimony from Litvakrsquos counterparties who stated that Litvakrsquos alleged misstatements were ldquoimportantrdquo to them and that the counterparties were injured by those misrepresentations by ultimately paying more than they would otherwise have bid for the securities Even though Litvak had credibly argued that the kind of statements at issue were a common business practice that should have had no relevance to pricing the panel concluded the testimony precluded a finding that no reasonable mind could find Litvakrsquos statements material And although the decision was not written as though it broke new ground the panelrsquos approach to materiality and deference to what investors considered to be important may have a lasting impact on the way the SEC pursues investigations by putting a greater focus on gathering evidence concerning investorsrsquo expectations At the same time the courtrsquos decision that excluding Litvakrsquos proffered materiality expert was an abuse of discretion will ensure that future defendants have more leeway to argue their positions in court

In sum while the district court cannot dismiss the remaining charges against Litvak on materiality grounds Litvak will have much more ammunition to fight these charges at trial And for future defendants (in both criminal and SEC actions) this opinion is a stark reminder that questions of materiality are highly fact-specific and that no misrepresentation should be presumed to be harmless or immune from prosecution

Securities Enforcement 2015 Year-End Review Page 13

IV Selected Significant Investigations and Cases

Below we highlight some of the more notable SEC enforcement actions from the latter half of 2015

A Investment Advisers

The SEC continued its especially vigorous oversight of investment advisers in 2015 It brought enforcement actions focused on representations of investment risk and performance disclosure of conflicts of interest the Custody and Compliance Rules of the Advisers Act and disclosure of fees and expenses while signaling a particularly increased focus on private equity

1 Misrepresentation of Investment Risk and Performance

On July 31 2015 the SEC filed a settled AP against a financial advisory firm and its founder Walter F Grenda Jr The SEC alleged that Grenda made false and misleading statements to the firmrsquos advisory clients in recommending and selling investments in a hedge fund called Prestige Wealth Management Fund LP (Prestige Fund) Grendarsquos statements allegedly misled clients into believing that the investments were less risky than they actually were Grenda also allegedly borrowed $175000 from two of his clients which the SEC claimed he misrepresented would be for business purposes but which he spent on personal expenses and debts In its settlement order the SEC found that the advisory firm and Grenda violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder The SEC also found that the advisory firm and Grenda violated Sections 206(1) and 206(2) of the Advisers Act and that Grenda willfully aided and abetted Prestige Fundrsquos violations of Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder The advisory firm was censured by the Commission and had its registration as an investment adviser revoked but did not pay any financial penalties Without admitting or denying wrongdoing Grenda agreed to pay $7741091 consisting of a $50000 civil monetary penalty and $2241091 in disgorgement and prejudgment interest60

On August 4 2015 the SEC instituted a settled AP against Gold Mountain LLC an investment adviser in Iowa and its founder Gregory Bied for allegedly defrauding investors through false statements in quarterly reports

Allegedly Gold Mountain and Bied made false statements from 2012 through mid-2014 to investors in a hedge fund managed by Gold Mountain namely that the fund was achieving positive quarterly returns when in fact the hedge fund had lost around 75 of its value over that time The SEC claimed that Gold Mountain and Bied violated Sections 9(b) and 206(4) of the Advisers Act Without admitting or denying the SECrsquos findings Gold Mountain and Bied consented to an industry bar and to pay a civil monetary penalty of $200000 which will be distributed to investors61

On November 30 2015 the SEC instituted settled APs against investment adviser Alpha Fiduciary Inc (AFI) Arthur Doglione AFIrsquos majority owner and president and Michael Shea AFIrsquos vice president and business development director The SEC alleged that AFIrsquos executive summaries firm profiles presentations and advertising materials contained certain hypothetical performance information but did not disclose that this data was completely hypothetical Moreover the SEC claimed that while some of AFIrsquos materials contained disclosure language the disclosure language did not appear on the same page as the hypothetical performance data rendering it misleading The SEC also found that although AFIrsquos compliance and procedures manual required the chief compliance officerrsquos prior review and approval of any marketing materials Doglione had exercised sole authority over AFIrsquos policies and procedures Thus the SEC alleged that he was solely responsible for the review and approval of AFIrsquos marketing materials prior to their distribution to clients or prospective clients The SEC also claimed that Shea knew that some of the data was hypothetical yet still included this information in materials he sent to clients Moreover Shea allegedly provided prospective clients with a report of an existing clientrsquos portfolio which represented a 144 return without taking any steps to determine if it was representative of the performance of other AFI clients The SEC claimed that AFI Doglione and Shea violated Sections 206(2) and 206(4) of the Advisers Act As part of the settlement the parties without admitting or denying the Commissionrsquos findings agreed to censures and a total of $550000 in penalties AFI agreed to pay a civil monetary penalty of $250000 to notify existing and prospective clients of the SECrsquos order and to obtain an independent compliance consultant Doglione agreed to a civil monetary penalty of $250000 and Shea agreed to a civil monetary penalty of $2500062

Securities Enforcement 2015 Year-End Review Page 14

2 Conflicts of Interest

On July 24 2015 the SEC instituted a settled AP against investment adviser Dion Money Management LLC (Dion) for allegedly failing to disclose adequately to clients a compensation arrangement whereby Dion received payments from third parties when client assets were invested in certain mutual funds The SEC asserted that although Dion disclosed the conflict of interest it understated the maximum payment rate under the arrangements with third parties and omitted the possibility that investors would receive payments from multiple parties based on the same client assets The SEC found that Dion violated Sections 206(2) and 207 of the Advisers Act Without admitting or denying the SECrsquos findings Dion agreed to amend its disclosures to provide notice to its clients of the SECrsquos order and pay a civil monetary penalty of $50000 63

On August 6 2015 the SEC instituted a settled AP against Tri-Star Advisors (TSA) TSA CEO William T Payne and TSA president Jon C Vaughan for alleged violations of the Advisers Act The SEC alleged that TSA made investment recommendations to its clients and executed trades while charging clients a sales credit ie a percentage mark-up without disclosing the credit to clients Payne and Vaughan allegedly received 55 of the sales credit generated by each trade The SEC claimed that TSA violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and that Payne and Vaughan caused TSA to violate Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the Commissionrsquos findings the respondents agreed to pay $779149 to settle the SECrsquos claims TSA agreed to pay a $150000 civil monetary penalty Payne agreed to pay disgorgement of $142500 prejudgment interest of $323521 and a civil monetary penalty of $19563521 and Vaughan agreed to pay disgorgement of $232500 prejudgment interest of $527850 and a civil monetary penalty of $5000064

On August 10 2015 the SEC instituted a settled AP against an investment management company for allegedly failing to disclose a conflict The SEC claimed that an advisory client made a $50 million loan to a senior executive which the SEC claimed allowed the executive to personally participate in an acquisition led by the management companyrsquos parent Allegedly the management company subsequently invested certain other clientsrsquo funds in two transactions in which the advisory client had invested on different terms The SEC asserted

that the management company thus breached its fiduciary duty by failing to disclose the potential conflict of interest to both sets of clients The SEC also alleged that the management company violated the Advisers Act by inadvertently billing a client approximately $65 million in asset management fees on non-managed assets by inaccurately coding the non-managed assets Finally the SEC alleged that the management company failed to implement certain compliance policies and procedures enforce its code of ethics and maintain required books and records The SEC found that the management company violated Sections 206(2) 206(4) 204(a) and 204A of the Advisers Act and Rules 206(4)-7 204-2(a)(3) 204-2(a)(5) and 204A-1 thereunder The management company agreed to pay a $20 million penalty without admitting or denying the Commissionrsquos findings65

Also on September 29 2015 the SEC filed a complaint in federal court against Lee D Weiss and his investment advisory firm Family Endowment Partners LP (FEP) for allegedly misappropriating investments and concealing conflicts of interest Weiss and FEP allegedly advised their clients to make investments in companies Weiss owned and controlled without telling the clients of their relationship to the companies The SEC claimed that Weiss and FEP then used the investment funds to pay FEPrsquos financial obligations and delinquent interest owed to other clients The SEC further claimed Weiss and FEP advised clients to invest approximately $5 million in a portfolio of consumer loans with a company that offered to pay an annual return of 18 but Weiss structured the investments so his clients received only 9 while he pocketed the remaining 9 The SEC claimed that Weiss and FEP violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Sections 206(1) 206(2) 206(3) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and Section 204(b)(5) of the Advisers Act and Rule 204-1 thereunder The SEC is seeking disgorgement from Weiss FEB and several companies owned by Weiss66 The action is ongoing

On September 30 2015 the SEC settled claims against Focus Media Holding Ltd (Focus) a China-based advertising company and its founder Jason Jiang The SEC alleged Focus and Jiang failed to adequately disclose the partial sale of securities of Focusrsquos wholly owned subsidiary Allyes Online Media Holdings Ltd (Allyes) to certain Allyes and Focus insiders before the securities

Securities Enforcement 2015 Year-End Review Page 15

were sold to a private equity firm Allegedly the securities were sold to the private equity firm at approximately six times the price the insiders had paid for the securities The SEC alleged that the failure to disclose the sales to insiders violated the reporting and antifraud provisions of the federal securities laws Without admitting or denying the SECrsquos allegations Focus agreed to pay a civil monetary penalty of $346 million and Jiang agreed to pay a civil monetary penalty of $969 million disgorgement of $9690000 and prejudgment interest of $164786567

On October 16 2015 the SEC filed a civil injunctive action in federal court in the District of Colorado against Donald J Lester and his private equity firm alleging violations of the federal securities laws The SEC alleged that starting in January 2010 and continuing for five years Lester and his firm sold unregistered securities in two investment funds they managed CFI Fund LLC (CFI) and NuPower LLC (NuPower) raising approximately $10 million The SEC further alleged that the funds acted as unregistered investment companies and neither Lester nor his firm were registered as brokers or associated with registered brokers while trading in securities Additionally Lester purportedly devised a fraudulent scheme to use $28 million of CFI investment funds to meet his firmrsquos repayment obligation to a group of investment funds called Equity Edge that Lesterrsquos firm guaranteed Specifically the SEC alleged that Lesterrsquos firm transferred NuPower to Equity Edge for no consideration after which CFI purchased a 50 interest in NuPower from Equity Edge for $28 million CFIrsquos investors allegedly were not informed about the conflict of interest in the transaction or about the purchase The SEC is seeking among other relief permanent injunctions civil monetary penalties and disgorgement with prejudgment interest68 The action is pending

On June 29 2015 the SEC filed a settled AP against Welhouse amp Associates Inc (WAI) a state-registered investment adviser and its owner principal and CCO Mark Welhouse for an alleged ldquocherry-pickingrdquo scheme which purportedly violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act According to the SEC from February 2010 until January 2013 Welhouse and his firm allocated options trades in an SampP 500 exchange traded fund in a manner that violated his fiduciary duty Specifically the SEC claims that Welhouse disproportionately allocated profitable trades to his

personal and business accounts and allocated unprofitable trades to his advisory clients Welhouse allegedly made this unfair allocation through purchasing options in an omnibus account and delaying allocation of the purchases until after the value of the trades could be determined Without admitting or denying the SECrsquos findings Welhouse and WAI agreed to jointly and severally pay disgorgement of $418141 prejudgment interest of $5091860 and a $300000 civil monetary penalty In addition WAI was censured and Welhouse was barred from the securities industry69

3 Custody and Compliance Rules of the Advisers Act

On August 6 2015 the SEC instituted a settled AP against Reid S Johnson founder sole owner president and managing director of The Planning Group of Scottsdale LLC (TPGS) an Arizona-based investment adviser for allegedly aiding and abetting violations of Rules 206(4)-2 (the Custody Rule) and 206(4)-7 (the Compliance Rule) under the Advisers Act The Custody Rule imposes detailed requirements governing the manner in which a SEC-registered investment adviser must hold client assets and related obligations The Compliance Rule requires registered investment advisers to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act by the adviser and any of its supervised persons

The SEC alleged that TPGS violated the Custody Rule by failing to accurately determine the securities over which it had custody and by failing to ensure that the securities were maintained by a qualified custodian The SEC also charged that TPGS violated the Compliance Rule by failing to maintain an adequate compliance manual because TPGSrsquos compliance manual did not address the 2009 amendments to the custody rule Finally the SEC charged that TPGS and Johnson willfully made materially false representations in TPGSrsquos Forms ADV from 2010 through 201270 The action is ongoing

On August 6 2015 the SEC instituted a settled AP against a Texas-based investment advisory firm its sole owner and manager John P Bott and its former Chief Compliance Officer F Robert Falkenberg for allegedly violating the principal transaction prohibitions and Custody and Compliance Rules under the Advisers Act The SEC claimed that the investment advisory firm failed to provide any prior written disclosure or obtain consent from clients for at least 2000 securities transactions and

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 11

Although Kochrsquos alleged market manipulation occurred in 2009 a year before Dodd-Frank the SEC sought to bar Koch from the securities industry pursuant to its authority under Dodd-Frank

The presiding ALJ found that Koch engaged in market manipulation but only imposed a limited industry bar that barred Koch from associating with investment advisers Koch appealed to the Commission which not only affirmed the ALJrsquos findings but also expanded the industry bar imposed on Koch to include municipal advisers and ratings organizations Koch appealed the Commissionrsquos ruling to the DC Circuit which also affirmed that Koch had engaged in market manipulation but reversed the Commissionrsquos expansion of Kochrsquos industry bar The panel held that the SEC could not use Dodd-Frank to penalize Koch for conduct that occurred before the statute was enacted because Dodd-Frank did not expressly allow the SEC to apply its provisions retroactively and expanding Kochrsquos industry bar would ldquowould impair rights [Koch] possessed when he acted increase [Kochrsquos] liability for past conduct or impose new duties with respect to transactions already completedrdquo

A week after the DC Circuit ruled Commissioners Gallagher and Piwowar who had dissented from the SECrsquos order expanding Kochrsquos industry bar said in a joint statement that they were ldquopleasedrdquo with the courtrsquos holding and urged the SEC to address ldquoall impermissibly retroactive collateral bars that have been misapplied since the enactment of Dodd-Frankrdquo54

B Montford v SEC

On July 21 2015 the DC Circuit issued its opinion in Montford v SEC holding that the requirement under Section 4E of the Exchange Act that enforcement proceedings be brought within 180 days of a Wells notice (enacted with Dodd Frank) is not an enforceable jurisdictional requirement 55 Montford arose from an appeal of a final order from the Commission finding that respondents violated Sections 204 206 and 207 of the Advisors Act for among other things allegedly failing to disclose the receipt of fees from an investment manager while disclosing to customers that it was ldquoindependentrdquo and ldquoconflict freerdquo The Commission barred respondents from the securities industry required the disgorgement of $210000 and imposed civil penalties56

Respondents appealed the Commissionrsquos order to the DC Circuit raising two challenges each of which the court rejected First respondents argued that the institution of administrative proceedings more than 180 days after issuing a Wells notice violated Section 4E of the Exchange Act and required dismissal Section 4E of the Exchange Act provides that ldquo[n]ot later than 180 days after the date on which Commission staff provide a written Wells notification to any person the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent not to file an actionrdquo The deadline of Section 4E may be extended by the Director of the Division of Enforcement ldquofor certain complex actionsrdquo which the Commission submitted happened in the instant case 57 Without reaching the issue of whether the Commission properly extended the Section 4E deadline the court found that Section 4E of the Exchange Act was ambiguous as to whether its violation served to bar an action by the Commission Accordingly the court concluded that under Chevron the Commissionrsquos interpretation that Section 4E is not a jurisdictional bar was entitled to deference as long as it was reasonable which the court found it was

Second respondents argued that the Commission abused its discretion in imposing civil penalties and ordering disgorgement because in respondentsrsquo view the receipt of money was not illegal and there was no causal link between the Commissionrsquos order of penalties and disgorgement and the alleged nondisclosure The court rejected this argument too noting that the Commission has flexibility in imposing such penalties which will be upheld as long as they are reasonable

Because the Enforcement Division is generally diligent about ensuring that enforcement actions are filed within 180 days of a Wells notice (or seeking an extension from the Division Director) Montford may have limited practical impact More surprising is arguably the judicial finding of ambiguity in a statute that left little room for interpretation

C SEC v Caledonian Bank

On November 10 2015 in SEC v Caledonian Bank Judge William H Pauley III of the Southern District of New York denied the defendantsrsquo motion to dismiss an SEC complaint that defendants had engaged in unregistered sales of securities in violation of Sections 5(a) and 5(c) of the Securities Act as part of an alleged

Securities Enforcement 2015 Year-End Review Page 12

penny stock ldquopump-and-dumprdquo scheme that the SEC claimed netted them profits of $75 million According to the SEC the defendants allegedly aggressively marketed the stocks of four companies that contained few assets using a series of sham transactions to conceal beneficial ownership of the securities before offering them to the public The opinion on a motion to dismiss would likely be of limited interest if only considered for its holding

In declining to dismiss the pending case however Judge William H Pauley III aggressively criticized the SECrsquos failure to coordinate its enforcement efforts which he stated led to unintended consequences and collateral victims According to the courtrsquos opinion at the same time a team of Washington DC-based SEC attorneys had persuaded Judge Pauley in February 2015 to freeze the assets of a Cayman Islands bank that allegedly sold the fraudulent securities another team of New York-based SEC attorneys who were investigating the some of the same defendants had information showing that the bank had not sold the securities for its own account but merely acted as a broker According to the Judge Pauley the freeze order (which was predicated in part on the belief that the bank had not acted as a broker) had the effect of bankrupting the bank shortly thereafter Judge Pauley blamed the SECrsquos ldquobureaucratic siloingrdquo for causing what he described as an unfortunate and unnecessary outcome In a broader criticism of the SEC Judge Pauley stated ldquoit is hard to believe that those charged with overseeing enforcement are not monitoring activities to avoid needless duplication of effortrdquo and that ldquo[g]iven the high stakes in securities enforcement actions and in the face of a workload the SEC describes as an lsquooverwhelming burdenrsquo a self-examination may be appropriaterdquo It remains to be seen what impact the criticism will have

D United States v Litvak

On December 8 2015 in a highly anticipated ruling the United States Court of Appeals for the Second Circuit reversed bond trader Jesse Litvakrsquos conviction on false statement charges and vacated his conviction on securities fraud charges58 The panel held that the trial court abused its discretion when it excluded critical expert testimony regarding pricing in the bond market which could have bolstered Litvakrsquos arguments that his allegedly false statements were not material The panel only vacated Litvakrsquos securities fraud conviction however rejecting his central argument that the statements at issue were immaterial as a matter of law The SEC had brought a parallel civil action against Litvak arising out of the same

allegations which remains on hold pending the outcome of Litvakrsquos criminal case59

The panelrsquos decision was not a complete win for Litvak and could have broad implications for future SEC actions Litvakrsquos central defense at trial and on appeal was that his alleged misrepresentations which related to the profit he stood to make from counterparties on bond transactions were immaterial as a matter of law Specifically he argued that the statements were immaterial as a matter of law because they related to how much Litvak paid for the securities himself and had no impact on the value of the securities themselves Put another way Litvak argued that counterparties could not have considered his false statements important because they did not pertain to any objective valuation of the underlying securities

The panel rejected Litvakrsquos arguments pointing to testimony from Litvakrsquos counterparties who stated that Litvakrsquos alleged misstatements were ldquoimportantrdquo to them and that the counterparties were injured by those misrepresentations by ultimately paying more than they would otherwise have bid for the securities Even though Litvak had credibly argued that the kind of statements at issue were a common business practice that should have had no relevance to pricing the panel concluded the testimony precluded a finding that no reasonable mind could find Litvakrsquos statements material And although the decision was not written as though it broke new ground the panelrsquos approach to materiality and deference to what investors considered to be important may have a lasting impact on the way the SEC pursues investigations by putting a greater focus on gathering evidence concerning investorsrsquo expectations At the same time the courtrsquos decision that excluding Litvakrsquos proffered materiality expert was an abuse of discretion will ensure that future defendants have more leeway to argue their positions in court

In sum while the district court cannot dismiss the remaining charges against Litvak on materiality grounds Litvak will have much more ammunition to fight these charges at trial And for future defendants (in both criminal and SEC actions) this opinion is a stark reminder that questions of materiality are highly fact-specific and that no misrepresentation should be presumed to be harmless or immune from prosecution

Securities Enforcement 2015 Year-End Review Page 13

IV Selected Significant Investigations and Cases

Below we highlight some of the more notable SEC enforcement actions from the latter half of 2015

A Investment Advisers

The SEC continued its especially vigorous oversight of investment advisers in 2015 It brought enforcement actions focused on representations of investment risk and performance disclosure of conflicts of interest the Custody and Compliance Rules of the Advisers Act and disclosure of fees and expenses while signaling a particularly increased focus on private equity

1 Misrepresentation of Investment Risk and Performance

On July 31 2015 the SEC filed a settled AP against a financial advisory firm and its founder Walter F Grenda Jr The SEC alleged that Grenda made false and misleading statements to the firmrsquos advisory clients in recommending and selling investments in a hedge fund called Prestige Wealth Management Fund LP (Prestige Fund) Grendarsquos statements allegedly misled clients into believing that the investments were less risky than they actually were Grenda also allegedly borrowed $175000 from two of his clients which the SEC claimed he misrepresented would be for business purposes but which he spent on personal expenses and debts In its settlement order the SEC found that the advisory firm and Grenda violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder The SEC also found that the advisory firm and Grenda violated Sections 206(1) and 206(2) of the Advisers Act and that Grenda willfully aided and abetted Prestige Fundrsquos violations of Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder The advisory firm was censured by the Commission and had its registration as an investment adviser revoked but did not pay any financial penalties Without admitting or denying wrongdoing Grenda agreed to pay $7741091 consisting of a $50000 civil monetary penalty and $2241091 in disgorgement and prejudgment interest60

On August 4 2015 the SEC instituted a settled AP against Gold Mountain LLC an investment adviser in Iowa and its founder Gregory Bied for allegedly defrauding investors through false statements in quarterly reports

Allegedly Gold Mountain and Bied made false statements from 2012 through mid-2014 to investors in a hedge fund managed by Gold Mountain namely that the fund was achieving positive quarterly returns when in fact the hedge fund had lost around 75 of its value over that time The SEC claimed that Gold Mountain and Bied violated Sections 9(b) and 206(4) of the Advisers Act Without admitting or denying the SECrsquos findings Gold Mountain and Bied consented to an industry bar and to pay a civil monetary penalty of $200000 which will be distributed to investors61

On November 30 2015 the SEC instituted settled APs against investment adviser Alpha Fiduciary Inc (AFI) Arthur Doglione AFIrsquos majority owner and president and Michael Shea AFIrsquos vice president and business development director The SEC alleged that AFIrsquos executive summaries firm profiles presentations and advertising materials contained certain hypothetical performance information but did not disclose that this data was completely hypothetical Moreover the SEC claimed that while some of AFIrsquos materials contained disclosure language the disclosure language did not appear on the same page as the hypothetical performance data rendering it misleading The SEC also found that although AFIrsquos compliance and procedures manual required the chief compliance officerrsquos prior review and approval of any marketing materials Doglione had exercised sole authority over AFIrsquos policies and procedures Thus the SEC alleged that he was solely responsible for the review and approval of AFIrsquos marketing materials prior to their distribution to clients or prospective clients The SEC also claimed that Shea knew that some of the data was hypothetical yet still included this information in materials he sent to clients Moreover Shea allegedly provided prospective clients with a report of an existing clientrsquos portfolio which represented a 144 return without taking any steps to determine if it was representative of the performance of other AFI clients The SEC claimed that AFI Doglione and Shea violated Sections 206(2) and 206(4) of the Advisers Act As part of the settlement the parties without admitting or denying the Commissionrsquos findings agreed to censures and a total of $550000 in penalties AFI agreed to pay a civil monetary penalty of $250000 to notify existing and prospective clients of the SECrsquos order and to obtain an independent compliance consultant Doglione agreed to a civil monetary penalty of $250000 and Shea agreed to a civil monetary penalty of $2500062

Securities Enforcement 2015 Year-End Review Page 14

2 Conflicts of Interest

On July 24 2015 the SEC instituted a settled AP against investment adviser Dion Money Management LLC (Dion) for allegedly failing to disclose adequately to clients a compensation arrangement whereby Dion received payments from third parties when client assets were invested in certain mutual funds The SEC asserted that although Dion disclosed the conflict of interest it understated the maximum payment rate under the arrangements with third parties and omitted the possibility that investors would receive payments from multiple parties based on the same client assets The SEC found that Dion violated Sections 206(2) and 207 of the Advisers Act Without admitting or denying the SECrsquos findings Dion agreed to amend its disclosures to provide notice to its clients of the SECrsquos order and pay a civil monetary penalty of $50000 63

On August 6 2015 the SEC instituted a settled AP against Tri-Star Advisors (TSA) TSA CEO William T Payne and TSA president Jon C Vaughan for alleged violations of the Advisers Act The SEC alleged that TSA made investment recommendations to its clients and executed trades while charging clients a sales credit ie a percentage mark-up without disclosing the credit to clients Payne and Vaughan allegedly received 55 of the sales credit generated by each trade The SEC claimed that TSA violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and that Payne and Vaughan caused TSA to violate Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the Commissionrsquos findings the respondents agreed to pay $779149 to settle the SECrsquos claims TSA agreed to pay a $150000 civil monetary penalty Payne agreed to pay disgorgement of $142500 prejudgment interest of $323521 and a civil monetary penalty of $19563521 and Vaughan agreed to pay disgorgement of $232500 prejudgment interest of $527850 and a civil monetary penalty of $5000064

On August 10 2015 the SEC instituted a settled AP against an investment management company for allegedly failing to disclose a conflict The SEC claimed that an advisory client made a $50 million loan to a senior executive which the SEC claimed allowed the executive to personally participate in an acquisition led by the management companyrsquos parent Allegedly the management company subsequently invested certain other clientsrsquo funds in two transactions in which the advisory client had invested on different terms The SEC asserted

that the management company thus breached its fiduciary duty by failing to disclose the potential conflict of interest to both sets of clients The SEC also alleged that the management company violated the Advisers Act by inadvertently billing a client approximately $65 million in asset management fees on non-managed assets by inaccurately coding the non-managed assets Finally the SEC alleged that the management company failed to implement certain compliance policies and procedures enforce its code of ethics and maintain required books and records The SEC found that the management company violated Sections 206(2) 206(4) 204(a) and 204A of the Advisers Act and Rules 206(4)-7 204-2(a)(3) 204-2(a)(5) and 204A-1 thereunder The management company agreed to pay a $20 million penalty without admitting or denying the Commissionrsquos findings65

Also on September 29 2015 the SEC filed a complaint in federal court against Lee D Weiss and his investment advisory firm Family Endowment Partners LP (FEP) for allegedly misappropriating investments and concealing conflicts of interest Weiss and FEP allegedly advised their clients to make investments in companies Weiss owned and controlled without telling the clients of their relationship to the companies The SEC claimed that Weiss and FEP then used the investment funds to pay FEPrsquos financial obligations and delinquent interest owed to other clients The SEC further claimed Weiss and FEP advised clients to invest approximately $5 million in a portfolio of consumer loans with a company that offered to pay an annual return of 18 but Weiss structured the investments so his clients received only 9 while he pocketed the remaining 9 The SEC claimed that Weiss and FEP violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Sections 206(1) 206(2) 206(3) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and Section 204(b)(5) of the Advisers Act and Rule 204-1 thereunder The SEC is seeking disgorgement from Weiss FEB and several companies owned by Weiss66 The action is ongoing

On September 30 2015 the SEC settled claims against Focus Media Holding Ltd (Focus) a China-based advertising company and its founder Jason Jiang The SEC alleged Focus and Jiang failed to adequately disclose the partial sale of securities of Focusrsquos wholly owned subsidiary Allyes Online Media Holdings Ltd (Allyes) to certain Allyes and Focus insiders before the securities

Securities Enforcement 2015 Year-End Review Page 15

were sold to a private equity firm Allegedly the securities were sold to the private equity firm at approximately six times the price the insiders had paid for the securities The SEC alleged that the failure to disclose the sales to insiders violated the reporting and antifraud provisions of the federal securities laws Without admitting or denying the SECrsquos allegations Focus agreed to pay a civil monetary penalty of $346 million and Jiang agreed to pay a civil monetary penalty of $969 million disgorgement of $9690000 and prejudgment interest of $164786567

On October 16 2015 the SEC filed a civil injunctive action in federal court in the District of Colorado against Donald J Lester and his private equity firm alleging violations of the federal securities laws The SEC alleged that starting in January 2010 and continuing for five years Lester and his firm sold unregistered securities in two investment funds they managed CFI Fund LLC (CFI) and NuPower LLC (NuPower) raising approximately $10 million The SEC further alleged that the funds acted as unregistered investment companies and neither Lester nor his firm were registered as brokers or associated with registered brokers while trading in securities Additionally Lester purportedly devised a fraudulent scheme to use $28 million of CFI investment funds to meet his firmrsquos repayment obligation to a group of investment funds called Equity Edge that Lesterrsquos firm guaranteed Specifically the SEC alleged that Lesterrsquos firm transferred NuPower to Equity Edge for no consideration after which CFI purchased a 50 interest in NuPower from Equity Edge for $28 million CFIrsquos investors allegedly were not informed about the conflict of interest in the transaction or about the purchase The SEC is seeking among other relief permanent injunctions civil monetary penalties and disgorgement with prejudgment interest68 The action is pending

On June 29 2015 the SEC filed a settled AP against Welhouse amp Associates Inc (WAI) a state-registered investment adviser and its owner principal and CCO Mark Welhouse for an alleged ldquocherry-pickingrdquo scheme which purportedly violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act According to the SEC from February 2010 until January 2013 Welhouse and his firm allocated options trades in an SampP 500 exchange traded fund in a manner that violated his fiduciary duty Specifically the SEC claims that Welhouse disproportionately allocated profitable trades to his

personal and business accounts and allocated unprofitable trades to his advisory clients Welhouse allegedly made this unfair allocation through purchasing options in an omnibus account and delaying allocation of the purchases until after the value of the trades could be determined Without admitting or denying the SECrsquos findings Welhouse and WAI agreed to jointly and severally pay disgorgement of $418141 prejudgment interest of $5091860 and a $300000 civil monetary penalty In addition WAI was censured and Welhouse was barred from the securities industry69

3 Custody and Compliance Rules of the Advisers Act

On August 6 2015 the SEC instituted a settled AP against Reid S Johnson founder sole owner president and managing director of The Planning Group of Scottsdale LLC (TPGS) an Arizona-based investment adviser for allegedly aiding and abetting violations of Rules 206(4)-2 (the Custody Rule) and 206(4)-7 (the Compliance Rule) under the Advisers Act The Custody Rule imposes detailed requirements governing the manner in which a SEC-registered investment adviser must hold client assets and related obligations The Compliance Rule requires registered investment advisers to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act by the adviser and any of its supervised persons

The SEC alleged that TPGS violated the Custody Rule by failing to accurately determine the securities over which it had custody and by failing to ensure that the securities were maintained by a qualified custodian The SEC also charged that TPGS violated the Compliance Rule by failing to maintain an adequate compliance manual because TPGSrsquos compliance manual did not address the 2009 amendments to the custody rule Finally the SEC charged that TPGS and Johnson willfully made materially false representations in TPGSrsquos Forms ADV from 2010 through 201270 The action is ongoing

On August 6 2015 the SEC instituted a settled AP against a Texas-based investment advisory firm its sole owner and manager John P Bott and its former Chief Compliance Officer F Robert Falkenberg for allegedly violating the principal transaction prohibitions and Custody and Compliance Rules under the Advisers Act The SEC claimed that the investment advisory firm failed to provide any prior written disclosure or obtain consent from clients for at least 2000 securities transactions and

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 12

penny stock ldquopump-and-dumprdquo scheme that the SEC claimed netted them profits of $75 million According to the SEC the defendants allegedly aggressively marketed the stocks of four companies that contained few assets using a series of sham transactions to conceal beneficial ownership of the securities before offering them to the public The opinion on a motion to dismiss would likely be of limited interest if only considered for its holding

In declining to dismiss the pending case however Judge William H Pauley III aggressively criticized the SECrsquos failure to coordinate its enforcement efforts which he stated led to unintended consequences and collateral victims According to the courtrsquos opinion at the same time a team of Washington DC-based SEC attorneys had persuaded Judge Pauley in February 2015 to freeze the assets of a Cayman Islands bank that allegedly sold the fraudulent securities another team of New York-based SEC attorneys who were investigating the some of the same defendants had information showing that the bank had not sold the securities for its own account but merely acted as a broker According to the Judge Pauley the freeze order (which was predicated in part on the belief that the bank had not acted as a broker) had the effect of bankrupting the bank shortly thereafter Judge Pauley blamed the SECrsquos ldquobureaucratic siloingrdquo for causing what he described as an unfortunate and unnecessary outcome In a broader criticism of the SEC Judge Pauley stated ldquoit is hard to believe that those charged with overseeing enforcement are not monitoring activities to avoid needless duplication of effortrdquo and that ldquo[g]iven the high stakes in securities enforcement actions and in the face of a workload the SEC describes as an lsquooverwhelming burdenrsquo a self-examination may be appropriaterdquo It remains to be seen what impact the criticism will have

D United States v Litvak

On December 8 2015 in a highly anticipated ruling the United States Court of Appeals for the Second Circuit reversed bond trader Jesse Litvakrsquos conviction on false statement charges and vacated his conviction on securities fraud charges58 The panel held that the trial court abused its discretion when it excluded critical expert testimony regarding pricing in the bond market which could have bolstered Litvakrsquos arguments that his allegedly false statements were not material The panel only vacated Litvakrsquos securities fraud conviction however rejecting his central argument that the statements at issue were immaterial as a matter of law The SEC had brought a parallel civil action against Litvak arising out of the same

allegations which remains on hold pending the outcome of Litvakrsquos criminal case59

The panelrsquos decision was not a complete win for Litvak and could have broad implications for future SEC actions Litvakrsquos central defense at trial and on appeal was that his alleged misrepresentations which related to the profit he stood to make from counterparties on bond transactions were immaterial as a matter of law Specifically he argued that the statements were immaterial as a matter of law because they related to how much Litvak paid for the securities himself and had no impact on the value of the securities themselves Put another way Litvak argued that counterparties could not have considered his false statements important because they did not pertain to any objective valuation of the underlying securities

The panel rejected Litvakrsquos arguments pointing to testimony from Litvakrsquos counterparties who stated that Litvakrsquos alleged misstatements were ldquoimportantrdquo to them and that the counterparties were injured by those misrepresentations by ultimately paying more than they would otherwise have bid for the securities Even though Litvak had credibly argued that the kind of statements at issue were a common business practice that should have had no relevance to pricing the panel concluded the testimony precluded a finding that no reasonable mind could find Litvakrsquos statements material And although the decision was not written as though it broke new ground the panelrsquos approach to materiality and deference to what investors considered to be important may have a lasting impact on the way the SEC pursues investigations by putting a greater focus on gathering evidence concerning investorsrsquo expectations At the same time the courtrsquos decision that excluding Litvakrsquos proffered materiality expert was an abuse of discretion will ensure that future defendants have more leeway to argue their positions in court

In sum while the district court cannot dismiss the remaining charges against Litvak on materiality grounds Litvak will have much more ammunition to fight these charges at trial And for future defendants (in both criminal and SEC actions) this opinion is a stark reminder that questions of materiality are highly fact-specific and that no misrepresentation should be presumed to be harmless or immune from prosecution

Securities Enforcement 2015 Year-End Review Page 13

IV Selected Significant Investigations and Cases

Below we highlight some of the more notable SEC enforcement actions from the latter half of 2015

A Investment Advisers

The SEC continued its especially vigorous oversight of investment advisers in 2015 It brought enforcement actions focused on representations of investment risk and performance disclosure of conflicts of interest the Custody and Compliance Rules of the Advisers Act and disclosure of fees and expenses while signaling a particularly increased focus on private equity

1 Misrepresentation of Investment Risk and Performance

On July 31 2015 the SEC filed a settled AP against a financial advisory firm and its founder Walter F Grenda Jr The SEC alleged that Grenda made false and misleading statements to the firmrsquos advisory clients in recommending and selling investments in a hedge fund called Prestige Wealth Management Fund LP (Prestige Fund) Grendarsquos statements allegedly misled clients into believing that the investments were less risky than they actually were Grenda also allegedly borrowed $175000 from two of his clients which the SEC claimed he misrepresented would be for business purposes but which he spent on personal expenses and debts In its settlement order the SEC found that the advisory firm and Grenda violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder The SEC also found that the advisory firm and Grenda violated Sections 206(1) and 206(2) of the Advisers Act and that Grenda willfully aided and abetted Prestige Fundrsquos violations of Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder The advisory firm was censured by the Commission and had its registration as an investment adviser revoked but did not pay any financial penalties Without admitting or denying wrongdoing Grenda agreed to pay $7741091 consisting of a $50000 civil monetary penalty and $2241091 in disgorgement and prejudgment interest60

On August 4 2015 the SEC instituted a settled AP against Gold Mountain LLC an investment adviser in Iowa and its founder Gregory Bied for allegedly defrauding investors through false statements in quarterly reports

Allegedly Gold Mountain and Bied made false statements from 2012 through mid-2014 to investors in a hedge fund managed by Gold Mountain namely that the fund was achieving positive quarterly returns when in fact the hedge fund had lost around 75 of its value over that time The SEC claimed that Gold Mountain and Bied violated Sections 9(b) and 206(4) of the Advisers Act Without admitting or denying the SECrsquos findings Gold Mountain and Bied consented to an industry bar and to pay a civil monetary penalty of $200000 which will be distributed to investors61

On November 30 2015 the SEC instituted settled APs against investment adviser Alpha Fiduciary Inc (AFI) Arthur Doglione AFIrsquos majority owner and president and Michael Shea AFIrsquos vice president and business development director The SEC alleged that AFIrsquos executive summaries firm profiles presentations and advertising materials contained certain hypothetical performance information but did not disclose that this data was completely hypothetical Moreover the SEC claimed that while some of AFIrsquos materials contained disclosure language the disclosure language did not appear on the same page as the hypothetical performance data rendering it misleading The SEC also found that although AFIrsquos compliance and procedures manual required the chief compliance officerrsquos prior review and approval of any marketing materials Doglione had exercised sole authority over AFIrsquos policies and procedures Thus the SEC alleged that he was solely responsible for the review and approval of AFIrsquos marketing materials prior to their distribution to clients or prospective clients The SEC also claimed that Shea knew that some of the data was hypothetical yet still included this information in materials he sent to clients Moreover Shea allegedly provided prospective clients with a report of an existing clientrsquos portfolio which represented a 144 return without taking any steps to determine if it was representative of the performance of other AFI clients The SEC claimed that AFI Doglione and Shea violated Sections 206(2) and 206(4) of the Advisers Act As part of the settlement the parties without admitting or denying the Commissionrsquos findings agreed to censures and a total of $550000 in penalties AFI agreed to pay a civil monetary penalty of $250000 to notify existing and prospective clients of the SECrsquos order and to obtain an independent compliance consultant Doglione agreed to a civil monetary penalty of $250000 and Shea agreed to a civil monetary penalty of $2500062

Securities Enforcement 2015 Year-End Review Page 14

2 Conflicts of Interest

On July 24 2015 the SEC instituted a settled AP against investment adviser Dion Money Management LLC (Dion) for allegedly failing to disclose adequately to clients a compensation arrangement whereby Dion received payments from third parties when client assets were invested in certain mutual funds The SEC asserted that although Dion disclosed the conflict of interest it understated the maximum payment rate under the arrangements with third parties and omitted the possibility that investors would receive payments from multiple parties based on the same client assets The SEC found that Dion violated Sections 206(2) and 207 of the Advisers Act Without admitting or denying the SECrsquos findings Dion agreed to amend its disclosures to provide notice to its clients of the SECrsquos order and pay a civil monetary penalty of $50000 63

On August 6 2015 the SEC instituted a settled AP against Tri-Star Advisors (TSA) TSA CEO William T Payne and TSA president Jon C Vaughan for alleged violations of the Advisers Act The SEC alleged that TSA made investment recommendations to its clients and executed trades while charging clients a sales credit ie a percentage mark-up without disclosing the credit to clients Payne and Vaughan allegedly received 55 of the sales credit generated by each trade The SEC claimed that TSA violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and that Payne and Vaughan caused TSA to violate Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the Commissionrsquos findings the respondents agreed to pay $779149 to settle the SECrsquos claims TSA agreed to pay a $150000 civil monetary penalty Payne agreed to pay disgorgement of $142500 prejudgment interest of $323521 and a civil monetary penalty of $19563521 and Vaughan agreed to pay disgorgement of $232500 prejudgment interest of $527850 and a civil monetary penalty of $5000064

On August 10 2015 the SEC instituted a settled AP against an investment management company for allegedly failing to disclose a conflict The SEC claimed that an advisory client made a $50 million loan to a senior executive which the SEC claimed allowed the executive to personally participate in an acquisition led by the management companyrsquos parent Allegedly the management company subsequently invested certain other clientsrsquo funds in two transactions in which the advisory client had invested on different terms The SEC asserted

that the management company thus breached its fiduciary duty by failing to disclose the potential conflict of interest to both sets of clients The SEC also alleged that the management company violated the Advisers Act by inadvertently billing a client approximately $65 million in asset management fees on non-managed assets by inaccurately coding the non-managed assets Finally the SEC alleged that the management company failed to implement certain compliance policies and procedures enforce its code of ethics and maintain required books and records The SEC found that the management company violated Sections 206(2) 206(4) 204(a) and 204A of the Advisers Act and Rules 206(4)-7 204-2(a)(3) 204-2(a)(5) and 204A-1 thereunder The management company agreed to pay a $20 million penalty without admitting or denying the Commissionrsquos findings65

Also on September 29 2015 the SEC filed a complaint in federal court against Lee D Weiss and his investment advisory firm Family Endowment Partners LP (FEP) for allegedly misappropriating investments and concealing conflicts of interest Weiss and FEP allegedly advised their clients to make investments in companies Weiss owned and controlled without telling the clients of their relationship to the companies The SEC claimed that Weiss and FEP then used the investment funds to pay FEPrsquos financial obligations and delinquent interest owed to other clients The SEC further claimed Weiss and FEP advised clients to invest approximately $5 million in a portfolio of consumer loans with a company that offered to pay an annual return of 18 but Weiss structured the investments so his clients received only 9 while he pocketed the remaining 9 The SEC claimed that Weiss and FEP violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Sections 206(1) 206(2) 206(3) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and Section 204(b)(5) of the Advisers Act and Rule 204-1 thereunder The SEC is seeking disgorgement from Weiss FEB and several companies owned by Weiss66 The action is ongoing

On September 30 2015 the SEC settled claims against Focus Media Holding Ltd (Focus) a China-based advertising company and its founder Jason Jiang The SEC alleged Focus and Jiang failed to adequately disclose the partial sale of securities of Focusrsquos wholly owned subsidiary Allyes Online Media Holdings Ltd (Allyes) to certain Allyes and Focus insiders before the securities

Securities Enforcement 2015 Year-End Review Page 15

were sold to a private equity firm Allegedly the securities were sold to the private equity firm at approximately six times the price the insiders had paid for the securities The SEC alleged that the failure to disclose the sales to insiders violated the reporting and antifraud provisions of the federal securities laws Without admitting or denying the SECrsquos allegations Focus agreed to pay a civil monetary penalty of $346 million and Jiang agreed to pay a civil monetary penalty of $969 million disgorgement of $9690000 and prejudgment interest of $164786567

On October 16 2015 the SEC filed a civil injunctive action in federal court in the District of Colorado against Donald J Lester and his private equity firm alleging violations of the federal securities laws The SEC alleged that starting in January 2010 and continuing for five years Lester and his firm sold unregistered securities in two investment funds they managed CFI Fund LLC (CFI) and NuPower LLC (NuPower) raising approximately $10 million The SEC further alleged that the funds acted as unregistered investment companies and neither Lester nor his firm were registered as brokers or associated with registered brokers while trading in securities Additionally Lester purportedly devised a fraudulent scheme to use $28 million of CFI investment funds to meet his firmrsquos repayment obligation to a group of investment funds called Equity Edge that Lesterrsquos firm guaranteed Specifically the SEC alleged that Lesterrsquos firm transferred NuPower to Equity Edge for no consideration after which CFI purchased a 50 interest in NuPower from Equity Edge for $28 million CFIrsquos investors allegedly were not informed about the conflict of interest in the transaction or about the purchase The SEC is seeking among other relief permanent injunctions civil monetary penalties and disgorgement with prejudgment interest68 The action is pending

On June 29 2015 the SEC filed a settled AP against Welhouse amp Associates Inc (WAI) a state-registered investment adviser and its owner principal and CCO Mark Welhouse for an alleged ldquocherry-pickingrdquo scheme which purportedly violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act According to the SEC from February 2010 until January 2013 Welhouse and his firm allocated options trades in an SampP 500 exchange traded fund in a manner that violated his fiduciary duty Specifically the SEC claims that Welhouse disproportionately allocated profitable trades to his

personal and business accounts and allocated unprofitable trades to his advisory clients Welhouse allegedly made this unfair allocation through purchasing options in an omnibus account and delaying allocation of the purchases until after the value of the trades could be determined Without admitting or denying the SECrsquos findings Welhouse and WAI agreed to jointly and severally pay disgorgement of $418141 prejudgment interest of $5091860 and a $300000 civil monetary penalty In addition WAI was censured and Welhouse was barred from the securities industry69

3 Custody and Compliance Rules of the Advisers Act

On August 6 2015 the SEC instituted a settled AP against Reid S Johnson founder sole owner president and managing director of The Planning Group of Scottsdale LLC (TPGS) an Arizona-based investment adviser for allegedly aiding and abetting violations of Rules 206(4)-2 (the Custody Rule) and 206(4)-7 (the Compliance Rule) under the Advisers Act The Custody Rule imposes detailed requirements governing the manner in which a SEC-registered investment adviser must hold client assets and related obligations The Compliance Rule requires registered investment advisers to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act by the adviser and any of its supervised persons

The SEC alleged that TPGS violated the Custody Rule by failing to accurately determine the securities over which it had custody and by failing to ensure that the securities were maintained by a qualified custodian The SEC also charged that TPGS violated the Compliance Rule by failing to maintain an adequate compliance manual because TPGSrsquos compliance manual did not address the 2009 amendments to the custody rule Finally the SEC charged that TPGS and Johnson willfully made materially false representations in TPGSrsquos Forms ADV from 2010 through 201270 The action is ongoing

On August 6 2015 the SEC instituted a settled AP against a Texas-based investment advisory firm its sole owner and manager John P Bott and its former Chief Compliance Officer F Robert Falkenberg for allegedly violating the principal transaction prohibitions and Custody and Compliance Rules under the Advisers Act The SEC claimed that the investment advisory firm failed to provide any prior written disclosure or obtain consent from clients for at least 2000 securities transactions and

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 13

IV Selected Significant Investigations and Cases

Below we highlight some of the more notable SEC enforcement actions from the latter half of 2015

A Investment Advisers

The SEC continued its especially vigorous oversight of investment advisers in 2015 It brought enforcement actions focused on representations of investment risk and performance disclosure of conflicts of interest the Custody and Compliance Rules of the Advisers Act and disclosure of fees and expenses while signaling a particularly increased focus on private equity

1 Misrepresentation of Investment Risk and Performance

On July 31 2015 the SEC filed a settled AP against a financial advisory firm and its founder Walter F Grenda Jr The SEC alleged that Grenda made false and misleading statements to the firmrsquos advisory clients in recommending and selling investments in a hedge fund called Prestige Wealth Management Fund LP (Prestige Fund) Grendarsquos statements allegedly misled clients into believing that the investments were less risky than they actually were Grenda also allegedly borrowed $175000 from two of his clients which the SEC claimed he misrepresented would be for business purposes but which he spent on personal expenses and debts In its settlement order the SEC found that the advisory firm and Grenda violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder The SEC also found that the advisory firm and Grenda violated Sections 206(1) and 206(2) of the Advisers Act and that Grenda willfully aided and abetted Prestige Fundrsquos violations of Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder The advisory firm was censured by the Commission and had its registration as an investment adviser revoked but did not pay any financial penalties Without admitting or denying wrongdoing Grenda agreed to pay $7741091 consisting of a $50000 civil monetary penalty and $2241091 in disgorgement and prejudgment interest60

On August 4 2015 the SEC instituted a settled AP against Gold Mountain LLC an investment adviser in Iowa and its founder Gregory Bied for allegedly defrauding investors through false statements in quarterly reports

Allegedly Gold Mountain and Bied made false statements from 2012 through mid-2014 to investors in a hedge fund managed by Gold Mountain namely that the fund was achieving positive quarterly returns when in fact the hedge fund had lost around 75 of its value over that time The SEC claimed that Gold Mountain and Bied violated Sections 9(b) and 206(4) of the Advisers Act Without admitting or denying the SECrsquos findings Gold Mountain and Bied consented to an industry bar and to pay a civil monetary penalty of $200000 which will be distributed to investors61

On November 30 2015 the SEC instituted settled APs against investment adviser Alpha Fiduciary Inc (AFI) Arthur Doglione AFIrsquos majority owner and president and Michael Shea AFIrsquos vice president and business development director The SEC alleged that AFIrsquos executive summaries firm profiles presentations and advertising materials contained certain hypothetical performance information but did not disclose that this data was completely hypothetical Moreover the SEC claimed that while some of AFIrsquos materials contained disclosure language the disclosure language did not appear on the same page as the hypothetical performance data rendering it misleading The SEC also found that although AFIrsquos compliance and procedures manual required the chief compliance officerrsquos prior review and approval of any marketing materials Doglione had exercised sole authority over AFIrsquos policies and procedures Thus the SEC alleged that he was solely responsible for the review and approval of AFIrsquos marketing materials prior to their distribution to clients or prospective clients The SEC also claimed that Shea knew that some of the data was hypothetical yet still included this information in materials he sent to clients Moreover Shea allegedly provided prospective clients with a report of an existing clientrsquos portfolio which represented a 144 return without taking any steps to determine if it was representative of the performance of other AFI clients The SEC claimed that AFI Doglione and Shea violated Sections 206(2) and 206(4) of the Advisers Act As part of the settlement the parties without admitting or denying the Commissionrsquos findings agreed to censures and a total of $550000 in penalties AFI agreed to pay a civil monetary penalty of $250000 to notify existing and prospective clients of the SECrsquos order and to obtain an independent compliance consultant Doglione agreed to a civil monetary penalty of $250000 and Shea agreed to a civil monetary penalty of $2500062

Securities Enforcement 2015 Year-End Review Page 14

2 Conflicts of Interest

On July 24 2015 the SEC instituted a settled AP against investment adviser Dion Money Management LLC (Dion) for allegedly failing to disclose adequately to clients a compensation arrangement whereby Dion received payments from third parties when client assets were invested in certain mutual funds The SEC asserted that although Dion disclosed the conflict of interest it understated the maximum payment rate under the arrangements with third parties and omitted the possibility that investors would receive payments from multiple parties based on the same client assets The SEC found that Dion violated Sections 206(2) and 207 of the Advisers Act Without admitting or denying the SECrsquos findings Dion agreed to amend its disclosures to provide notice to its clients of the SECrsquos order and pay a civil monetary penalty of $50000 63

On August 6 2015 the SEC instituted a settled AP against Tri-Star Advisors (TSA) TSA CEO William T Payne and TSA president Jon C Vaughan for alleged violations of the Advisers Act The SEC alleged that TSA made investment recommendations to its clients and executed trades while charging clients a sales credit ie a percentage mark-up without disclosing the credit to clients Payne and Vaughan allegedly received 55 of the sales credit generated by each trade The SEC claimed that TSA violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and that Payne and Vaughan caused TSA to violate Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the Commissionrsquos findings the respondents agreed to pay $779149 to settle the SECrsquos claims TSA agreed to pay a $150000 civil monetary penalty Payne agreed to pay disgorgement of $142500 prejudgment interest of $323521 and a civil monetary penalty of $19563521 and Vaughan agreed to pay disgorgement of $232500 prejudgment interest of $527850 and a civil monetary penalty of $5000064

On August 10 2015 the SEC instituted a settled AP against an investment management company for allegedly failing to disclose a conflict The SEC claimed that an advisory client made a $50 million loan to a senior executive which the SEC claimed allowed the executive to personally participate in an acquisition led by the management companyrsquos parent Allegedly the management company subsequently invested certain other clientsrsquo funds in two transactions in which the advisory client had invested on different terms The SEC asserted

that the management company thus breached its fiduciary duty by failing to disclose the potential conflict of interest to both sets of clients The SEC also alleged that the management company violated the Advisers Act by inadvertently billing a client approximately $65 million in asset management fees on non-managed assets by inaccurately coding the non-managed assets Finally the SEC alleged that the management company failed to implement certain compliance policies and procedures enforce its code of ethics and maintain required books and records The SEC found that the management company violated Sections 206(2) 206(4) 204(a) and 204A of the Advisers Act and Rules 206(4)-7 204-2(a)(3) 204-2(a)(5) and 204A-1 thereunder The management company agreed to pay a $20 million penalty without admitting or denying the Commissionrsquos findings65

Also on September 29 2015 the SEC filed a complaint in federal court against Lee D Weiss and his investment advisory firm Family Endowment Partners LP (FEP) for allegedly misappropriating investments and concealing conflicts of interest Weiss and FEP allegedly advised their clients to make investments in companies Weiss owned and controlled without telling the clients of their relationship to the companies The SEC claimed that Weiss and FEP then used the investment funds to pay FEPrsquos financial obligations and delinquent interest owed to other clients The SEC further claimed Weiss and FEP advised clients to invest approximately $5 million in a portfolio of consumer loans with a company that offered to pay an annual return of 18 but Weiss structured the investments so his clients received only 9 while he pocketed the remaining 9 The SEC claimed that Weiss and FEP violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Sections 206(1) 206(2) 206(3) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and Section 204(b)(5) of the Advisers Act and Rule 204-1 thereunder The SEC is seeking disgorgement from Weiss FEB and several companies owned by Weiss66 The action is ongoing

On September 30 2015 the SEC settled claims against Focus Media Holding Ltd (Focus) a China-based advertising company and its founder Jason Jiang The SEC alleged Focus and Jiang failed to adequately disclose the partial sale of securities of Focusrsquos wholly owned subsidiary Allyes Online Media Holdings Ltd (Allyes) to certain Allyes and Focus insiders before the securities

Securities Enforcement 2015 Year-End Review Page 15

were sold to a private equity firm Allegedly the securities were sold to the private equity firm at approximately six times the price the insiders had paid for the securities The SEC alleged that the failure to disclose the sales to insiders violated the reporting and antifraud provisions of the federal securities laws Without admitting or denying the SECrsquos allegations Focus agreed to pay a civil monetary penalty of $346 million and Jiang agreed to pay a civil monetary penalty of $969 million disgorgement of $9690000 and prejudgment interest of $164786567

On October 16 2015 the SEC filed a civil injunctive action in federal court in the District of Colorado against Donald J Lester and his private equity firm alleging violations of the federal securities laws The SEC alleged that starting in January 2010 and continuing for five years Lester and his firm sold unregistered securities in two investment funds they managed CFI Fund LLC (CFI) and NuPower LLC (NuPower) raising approximately $10 million The SEC further alleged that the funds acted as unregistered investment companies and neither Lester nor his firm were registered as brokers or associated with registered brokers while trading in securities Additionally Lester purportedly devised a fraudulent scheme to use $28 million of CFI investment funds to meet his firmrsquos repayment obligation to a group of investment funds called Equity Edge that Lesterrsquos firm guaranteed Specifically the SEC alleged that Lesterrsquos firm transferred NuPower to Equity Edge for no consideration after which CFI purchased a 50 interest in NuPower from Equity Edge for $28 million CFIrsquos investors allegedly were not informed about the conflict of interest in the transaction or about the purchase The SEC is seeking among other relief permanent injunctions civil monetary penalties and disgorgement with prejudgment interest68 The action is pending

On June 29 2015 the SEC filed a settled AP against Welhouse amp Associates Inc (WAI) a state-registered investment adviser and its owner principal and CCO Mark Welhouse for an alleged ldquocherry-pickingrdquo scheme which purportedly violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act According to the SEC from February 2010 until January 2013 Welhouse and his firm allocated options trades in an SampP 500 exchange traded fund in a manner that violated his fiduciary duty Specifically the SEC claims that Welhouse disproportionately allocated profitable trades to his

personal and business accounts and allocated unprofitable trades to his advisory clients Welhouse allegedly made this unfair allocation through purchasing options in an omnibus account and delaying allocation of the purchases until after the value of the trades could be determined Without admitting or denying the SECrsquos findings Welhouse and WAI agreed to jointly and severally pay disgorgement of $418141 prejudgment interest of $5091860 and a $300000 civil monetary penalty In addition WAI was censured and Welhouse was barred from the securities industry69

3 Custody and Compliance Rules of the Advisers Act

On August 6 2015 the SEC instituted a settled AP against Reid S Johnson founder sole owner president and managing director of The Planning Group of Scottsdale LLC (TPGS) an Arizona-based investment adviser for allegedly aiding and abetting violations of Rules 206(4)-2 (the Custody Rule) and 206(4)-7 (the Compliance Rule) under the Advisers Act The Custody Rule imposes detailed requirements governing the manner in which a SEC-registered investment adviser must hold client assets and related obligations The Compliance Rule requires registered investment advisers to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act by the adviser and any of its supervised persons

The SEC alleged that TPGS violated the Custody Rule by failing to accurately determine the securities over which it had custody and by failing to ensure that the securities were maintained by a qualified custodian The SEC also charged that TPGS violated the Compliance Rule by failing to maintain an adequate compliance manual because TPGSrsquos compliance manual did not address the 2009 amendments to the custody rule Finally the SEC charged that TPGS and Johnson willfully made materially false representations in TPGSrsquos Forms ADV from 2010 through 201270 The action is ongoing

On August 6 2015 the SEC instituted a settled AP against a Texas-based investment advisory firm its sole owner and manager John P Bott and its former Chief Compliance Officer F Robert Falkenberg for allegedly violating the principal transaction prohibitions and Custody and Compliance Rules under the Advisers Act The SEC claimed that the investment advisory firm failed to provide any prior written disclosure or obtain consent from clients for at least 2000 securities transactions and

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 14

2 Conflicts of Interest

On July 24 2015 the SEC instituted a settled AP against investment adviser Dion Money Management LLC (Dion) for allegedly failing to disclose adequately to clients a compensation arrangement whereby Dion received payments from third parties when client assets were invested in certain mutual funds The SEC asserted that although Dion disclosed the conflict of interest it understated the maximum payment rate under the arrangements with third parties and omitted the possibility that investors would receive payments from multiple parties based on the same client assets The SEC found that Dion violated Sections 206(2) and 207 of the Advisers Act Without admitting or denying the SECrsquos findings Dion agreed to amend its disclosures to provide notice to its clients of the SECrsquos order and pay a civil monetary penalty of $50000 63

On August 6 2015 the SEC instituted a settled AP against Tri-Star Advisors (TSA) TSA CEO William T Payne and TSA president Jon C Vaughan for alleged violations of the Advisers Act The SEC alleged that TSA made investment recommendations to its clients and executed trades while charging clients a sales credit ie a percentage mark-up without disclosing the credit to clients Payne and Vaughan allegedly received 55 of the sales credit generated by each trade The SEC claimed that TSA violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and that Payne and Vaughan caused TSA to violate Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the Commissionrsquos findings the respondents agreed to pay $779149 to settle the SECrsquos claims TSA agreed to pay a $150000 civil monetary penalty Payne agreed to pay disgorgement of $142500 prejudgment interest of $323521 and a civil monetary penalty of $19563521 and Vaughan agreed to pay disgorgement of $232500 prejudgment interest of $527850 and a civil monetary penalty of $5000064

On August 10 2015 the SEC instituted a settled AP against an investment management company for allegedly failing to disclose a conflict The SEC claimed that an advisory client made a $50 million loan to a senior executive which the SEC claimed allowed the executive to personally participate in an acquisition led by the management companyrsquos parent Allegedly the management company subsequently invested certain other clientsrsquo funds in two transactions in which the advisory client had invested on different terms The SEC asserted

that the management company thus breached its fiduciary duty by failing to disclose the potential conflict of interest to both sets of clients The SEC also alleged that the management company violated the Advisers Act by inadvertently billing a client approximately $65 million in asset management fees on non-managed assets by inaccurately coding the non-managed assets Finally the SEC alleged that the management company failed to implement certain compliance policies and procedures enforce its code of ethics and maintain required books and records The SEC found that the management company violated Sections 206(2) 206(4) 204(a) and 204A of the Advisers Act and Rules 206(4)-7 204-2(a)(3) 204-2(a)(5) and 204A-1 thereunder The management company agreed to pay a $20 million penalty without admitting or denying the Commissionrsquos findings65

Also on September 29 2015 the SEC filed a complaint in federal court against Lee D Weiss and his investment advisory firm Family Endowment Partners LP (FEP) for allegedly misappropriating investments and concealing conflicts of interest Weiss and FEP allegedly advised their clients to make investments in companies Weiss owned and controlled without telling the clients of their relationship to the companies The SEC claimed that Weiss and FEP then used the investment funds to pay FEPrsquos financial obligations and delinquent interest owed to other clients The SEC further claimed Weiss and FEP advised clients to invest approximately $5 million in a portfolio of consumer loans with a company that offered to pay an annual return of 18 but Weiss structured the investments so his clients received only 9 while he pocketed the remaining 9 The SEC claimed that Weiss and FEP violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Sections 206(1) 206(2) 206(3) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and Section 204(b)(5) of the Advisers Act and Rule 204-1 thereunder The SEC is seeking disgorgement from Weiss FEB and several companies owned by Weiss66 The action is ongoing

On September 30 2015 the SEC settled claims against Focus Media Holding Ltd (Focus) a China-based advertising company and its founder Jason Jiang The SEC alleged Focus and Jiang failed to adequately disclose the partial sale of securities of Focusrsquos wholly owned subsidiary Allyes Online Media Holdings Ltd (Allyes) to certain Allyes and Focus insiders before the securities

Securities Enforcement 2015 Year-End Review Page 15

were sold to a private equity firm Allegedly the securities were sold to the private equity firm at approximately six times the price the insiders had paid for the securities The SEC alleged that the failure to disclose the sales to insiders violated the reporting and antifraud provisions of the federal securities laws Without admitting or denying the SECrsquos allegations Focus agreed to pay a civil monetary penalty of $346 million and Jiang agreed to pay a civil monetary penalty of $969 million disgorgement of $9690000 and prejudgment interest of $164786567

On October 16 2015 the SEC filed a civil injunctive action in federal court in the District of Colorado against Donald J Lester and his private equity firm alleging violations of the federal securities laws The SEC alleged that starting in January 2010 and continuing for five years Lester and his firm sold unregistered securities in two investment funds they managed CFI Fund LLC (CFI) and NuPower LLC (NuPower) raising approximately $10 million The SEC further alleged that the funds acted as unregistered investment companies and neither Lester nor his firm were registered as brokers or associated with registered brokers while trading in securities Additionally Lester purportedly devised a fraudulent scheme to use $28 million of CFI investment funds to meet his firmrsquos repayment obligation to a group of investment funds called Equity Edge that Lesterrsquos firm guaranteed Specifically the SEC alleged that Lesterrsquos firm transferred NuPower to Equity Edge for no consideration after which CFI purchased a 50 interest in NuPower from Equity Edge for $28 million CFIrsquos investors allegedly were not informed about the conflict of interest in the transaction or about the purchase The SEC is seeking among other relief permanent injunctions civil monetary penalties and disgorgement with prejudgment interest68 The action is pending

On June 29 2015 the SEC filed a settled AP against Welhouse amp Associates Inc (WAI) a state-registered investment adviser and its owner principal and CCO Mark Welhouse for an alleged ldquocherry-pickingrdquo scheme which purportedly violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act According to the SEC from February 2010 until January 2013 Welhouse and his firm allocated options trades in an SampP 500 exchange traded fund in a manner that violated his fiduciary duty Specifically the SEC claims that Welhouse disproportionately allocated profitable trades to his

personal and business accounts and allocated unprofitable trades to his advisory clients Welhouse allegedly made this unfair allocation through purchasing options in an omnibus account and delaying allocation of the purchases until after the value of the trades could be determined Without admitting or denying the SECrsquos findings Welhouse and WAI agreed to jointly and severally pay disgorgement of $418141 prejudgment interest of $5091860 and a $300000 civil monetary penalty In addition WAI was censured and Welhouse was barred from the securities industry69

3 Custody and Compliance Rules of the Advisers Act

On August 6 2015 the SEC instituted a settled AP against Reid S Johnson founder sole owner president and managing director of The Planning Group of Scottsdale LLC (TPGS) an Arizona-based investment adviser for allegedly aiding and abetting violations of Rules 206(4)-2 (the Custody Rule) and 206(4)-7 (the Compliance Rule) under the Advisers Act The Custody Rule imposes detailed requirements governing the manner in which a SEC-registered investment adviser must hold client assets and related obligations The Compliance Rule requires registered investment advisers to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act by the adviser and any of its supervised persons

The SEC alleged that TPGS violated the Custody Rule by failing to accurately determine the securities over which it had custody and by failing to ensure that the securities were maintained by a qualified custodian The SEC also charged that TPGS violated the Compliance Rule by failing to maintain an adequate compliance manual because TPGSrsquos compliance manual did not address the 2009 amendments to the custody rule Finally the SEC charged that TPGS and Johnson willfully made materially false representations in TPGSrsquos Forms ADV from 2010 through 201270 The action is ongoing

On August 6 2015 the SEC instituted a settled AP against a Texas-based investment advisory firm its sole owner and manager John P Bott and its former Chief Compliance Officer F Robert Falkenberg for allegedly violating the principal transaction prohibitions and Custody and Compliance Rules under the Advisers Act The SEC claimed that the investment advisory firm failed to provide any prior written disclosure or obtain consent from clients for at least 2000 securities transactions and

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 15

were sold to a private equity firm Allegedly the securities were sold to the private equity firm at approximately six times the price the insiders had paid for the securities The SEC alleged that the failure to disclose the sales to insiders violated the reporting and antifraud provisions of the federal securities laws Without admitting or denying the SECrsquos allegations Focus agreed to pay a civil monetary penalty of $346 million and Jiang agreed to pay a civil monetary penalty of $969 million disgorgement of $9690000 and prejudgment interest of $164786567

On October 16 2015 the SEC filed a civil injunctive action in federal court in the District of Colorado against Donald J Lester and his private equity firm alleging violations of the federal securities laws The SEC alleged that starting in January 2010 and continuing for five years Lester and his firm sold unregistered securities in two investment funds they managed CFI Fund LLC (CFI) and NuPower LLC (NuPower) raising approximately $10 million The SEC further alleged that the funds acted as unregistered investment companies and neither Lester nor his firm were registered as brokers or associated with registered brokers while trading in securities Additionally Lester purportedly devised a fraudulent scheme to use $28 million of CFI investment funds to meet his firmrsquos repayment obligation to a group of investment funds called Equity Edge that Lesterrsquos firm guaranteed Specifically the SEC alleged that Lesterrsquos firm transferred NuPower to Equity Edge for no consideration after which CFI purchased a 50 interest in NuPower from Equity Edge for $28 million CFIrsquos investors allegedly were not informed about the conflict of interest in the transaction or about the purchase The SEC is seeking among other relief permanent injunctions civil monetary penalties and disgorgement with prejudgment interest68 The action is pending

On June 29 2015 the SEC filed a settled AP against Welhouse amp Associates Inc (WAI) a state-registered investment adviser and its owner principal and CCO Mark Welhouse for an alleged ldquocherry-pickingrdquo scheme which purportedly violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act According to the SEC from February 2010 until January 2013 Welhouse and his firm allocated options trades in an SampP 500 exchange traded fund in a manner that violated his fiduciary duty Specifically the SEC claims that Welhouse disproportionately allocated profitable trades to his

personal and business accounts and allocated unprofitable trades to his advisory clients Welhouse allegedly made this unfair allocation through purchasing options in an omnibus account and delaying allocation of the purchases until after the value of the trades could be determined Without admitting or denying the SECrsquos findings Welhouse and WAI agreed to jointly and severally pay disgorgement of $418141 prejudgment interest of $5091860 and a $300000 civil monetary penalty In addition WAI was censured and Welhouse was barred from the securities industry69

3 Custody and Compliance Rules of the Advisers Act

On August 6 2015 the SEC instituted a settled AP against Reid S Johnson founder sole owner president and managing director of The Planning Group of Scottsdale LLC (TPGS) an Arizona-based investment adviser for allegedly aiding and abetting violations of Rules 206(4)-2 (the Custody Rule) and 206(4)-7 (the Compliance Rule) under the Advisers Act The Custody Rule imposes detailed requirements governing the manner in which a SEC-registered investment adviser must hold client assets and related obligations The Compliance Rule requires registered investment advisers to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act by the adviser and any of its supervised persons

The SEC alleged that TPGS violated the Custody Rule by failing to accurately determine the securities over which it had custody and by failing to ensure that the securities were maintained by a qualified custodian The SEC also charged that TPGS violated the Compliance Rule by failing to maintain an adequate compliance manual because TPGSrsquos compliance manual did not address the 2009 amendments to the custody rule Finally the SEC charged that TPGS and Johnson willfully made materially false representations in TPGSrsquos Forms ADV from 2010 through 201270 The action is ongoing

On August 6 2015 the SEC instituted a settled AP against a Texas-based investment advisory firm its sole owner and manager John P Bott and its former Chief Compliance Officer F Robert Falkenberg for allegedly violating the principal transaction prohibitions and Custody and Compliance Rules under the Advisers Act The SEC claimed that the investment advisory firm failed to provide any prior written disclosure or obtain consent from clients for at least 2000 securities transactions and

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 16

failed to provide investors in a pooled investment vehicle with audited financial statements In addition to allegedly failing to maintain and enforce a written code of ethics the investment advisory firm also allegedly failed to implement and monitor written policies and procedures designed to prevent violations of the Advisers Act The SEC claimed that Bott and Falkenberg willfully aided and abetted the investment advisory firmrsquos violations of Sections 206(3) 206(4) and 204A of the Advisers Act and Rules 206(4)-2 206(4)-7 and 204A-1 thereunder Without admitting or denying the claims the investment advisory firm agreed to pay a civil monetary penalty of $200000 Bott agreed to pay disgorgement of $450000 prejudgment interest of $5604 and a civil monetary penalty of $70000 and Falkenberg agreed to pay a civil monetary penalty of $40000 71

On November 19 2015 the SEC instituted settled APs against an investment advisory firm and its co-founders Martin and Steven Sands for allegedly violating the Custody Rule by failing to provide investors with timely audited financial statements Notably in 2010 the SEC entered into a settlement with these parties for alleged violations of the Custody Rule as well The SEC alleged that notwithstanding its prior order the investment advisory firm continued to fail to comply with the Custody Rule in the years that followed Without admitting or denying liability the investment advisory firm and Martin and Steven Sands agreed to engage an independent monitor to perform reviews of the investment advisory firm and submit reports that confirm that the investment advisory firm distributed its audited financial statements in a timely fashion The investment advisory firm and Martin and Steven Sands also agreed to jointly and severally pay a $1000000 civil monetary penalty and be suspended from acting as investment advisors for a year72

4 Disclosure of Fees and Expenses

On September 2 2015 the SEC instituted a settled AP against Taberna Capital Management LLC (Taberna) a subsidiary of a real estate investment trust over claims that Taberna pocketed high fees that belonged to its clients in violation of Section 15(a) of the Exchange Act and Sections 206(1) 206(2) 206(4) and 207 of the Advisers Act and Rule 206(4)-8 thereunder Taberna allegedly began collecting fees on exchange transactions after the 2008 financial crisis when the real estate investment trusts it invested in began trying to restructure collateralized debt obligations while the real estate market stabilized Allegedly these fees greatly exceeded Tabernarsquos actual

out-of-pocket costs and were concealed from investors as ldquothird-party costsrdquo on term sheets and exchange agreements Taberna purportedly represented that these fees were used to pay legal and other administrative costs and attempted to dodge investorsrsquo questions about the fees This the SEC claimed led to a conflict of interest where Taberna sometimes sought to restructure transactions as exchanges instead of other structures even when it reduced the amount of cash available to the CDOs Without admitting or denying the SECrsquos findings Taberna agreed to pay $15 million in disgorgement and prejudgment interest and a $65 million penalty It also agreed to be barred from acting as an investment adviser for five years73

On September 21 2015 the SEC instituted a settled AP against First Eagle Investment Management LLC an investment manager and FEF Distributions LLC its affiliated distributor This was the Commissionrsquos first enforcement action arising from its ldquoDistribution-in-Guise Initiativerdquo an industry-wide set of OCIE examinations focusing on payments to sub-transfer agents and other intermediary contracts for fund distributions The settlement focused on agreements between the firm and two intermediaries that the firm had treated as sub-TA agreements that could be paid for by the Funds but which the SEC believed related at least in part to distribution services Without admitting or denying the SECrsquos allegations the investment manager agreed to reimburse the funds for the payments to the intermediaries regardless of whether any of the payments could reasonably be deemed for sub-transfer agent services74

The settlement with the firm put pressure on fund managers to ensure that intermediary contracts contain clear and precise language regarding the services intermediaries provide The settlement itself did not clearly articulate the language that the SEC believed should be used or the approach that boards should take regarding oversight of fees

Following the settlement on January 6 2016 the SEC Division of Investment Management issued guidance resulting from the Distribution in Guise Initiative The guidance focused on the need for fund boards to develop and maintain a process to evaluate intermediary payments and in particular sub-TA payments At the same time the guidance acknowledged that the volume and complexity of intermediary contracts at a typical fund firm make it challenging to develop clear lines The guidance was perhaps most notable for its list of ldquored flagsrdquo which it

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 17

indicated require particular scrutiny by fund Boards Those include distribution activity conditioned on payment of sub-TA fees the lack of a 12b-1 plan tiered and bundled payments to intermediaries and large disparities in fees paid to various intermediaries While the guidance provides some protection to fund Boards by acknowledging the challenges they face it could also present a roadmap for future enforcement cases against any fund Boards that fail to institute a thoughtful and comprehensive process to evaluate intermediary relationships75

On October 21 2015 the SEC instituted a settled AP against Oklahoma-based investment advisor Retirement Investment Advisors Inc (RIA) investment manager Research Holdings LLC (Research Holdings) and RIArsquos president and Research Holdingsrsquo co-manager Joseph Wayne Bowie The SEC alleged that Research Holdings which was not a registered investment adviser and Bowie offered and sold interests in five private funds to advisory clients at RIA The SEC also alleged that among other things RIA and Bowie valued the clientsrsquo investments in the funds based on the acquisition cost even though many had little or no value which resulted in fee overcharges to clients Finally the SEC asserted that Bowie caused RIA to fail to maintain copies of its business communications The SEC found that RIA Research Holdings and Bowie violated Sections 204 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(7)(i) and 206(4)-8 thereunder Without admitting or denying the Commissionrsquos findings RIA agreed to pay disgorgement of $144243 prejudgment interest of $14724 and a civil monetary penalty of $37500 Bowie agreed to pay a civil monetary penalty of $25000 and Research Holdings agreed to pay a civil monetary penalty of $3750076

On November 5 2015 the SEC instituted settled APs against Cherokee Investment Partners LLC (CIP) and Cherokee Advisers LLC (CA) (collectively Cherokee) for the alleged improper allocation to clients of consulting legal and compliance-related expenses According to the SEC Cherokee incurred $455698 in costs in the course of preparing for registration as investment advisers and complying with legal obligations arising from registration While the agreements with respect to the funds allowed for expenses to be charged based on Cherokeersquos good faith judgment Cherokee allegedly did not disclose that funds would be charged for the advisersrsquo legal and compliance expenses Moreover the SEC alleged that both Cherokee entities failed to adopt written policies or procedures

reasonably designed to prevent such misallocation The SEC claimed that Cherokee violated Section 206(2) of the Advisers Act and Section 206(4) of the Advisers Act Without admitting or denying the allegations Cherokee agreed to pay a civil monetary penalty in the amount of $10000077

On November 23 2015 the SEC announced a settled AP against Cranshire Capital Advisors LLC (CCA) an investment adviser that allegedly charged expenses to its fund clients and failed to adopt and implement compliance policies and procedures CCA purportedly used fund assets to pay for CCArsquos legal compliance and operating expenses in a manner that was not disclosed or authorized in the fundrsquos organizational documents According to the SEC this resulted in the improper use of $158650 of fund assets to pay compliance consultant fees and attorney fees as well as $118378 to pay for office supplies and utilities Moreover the SEC claimed that the improper allocation of expenses to the fund was caused in part by CCArsquos failure to adopt or implement an adequate compliance program and asserted claims against CCA for violations of Sections 206(2) and 206(4) of the Advisers Act As part of the settlement with the SEC and without admitting or denying the findings CCA agreed to a censure and to pay a civil monetary penalty of $250000 CCA also agreed to retain a compliance consultant and provide a copy of the settlement order to all shareholders and limited partners78

5 Stock Manipulation

The SEC also brought enforcement actions in the second half of 2015 against investment advisers who allegedly engaged in schemes to manipulate stock prices

On September 24 2015 the SEC instituted a settled AP against Michael A Glickstein and his investment advisory firm G Asset Management LLC (GAM) The SEC alleged that the Glickstein and GAM violated the antifraud provisions of the federal securities laws by announcing their intent to purchase a majority stake in Barnes amp Noble even though GAM had no ability to finance the purchase which caused Barnes amp Noblersquos share price company to rise and allowed respondents to make a $168000 profit on shares and options that GAM had purchased shortly before its announcement Without admitting or denying the SECrsquos allegations GAM and Glickstein consented to a settlement that requires them to return $175000 representing their $168000 profits GAM agreed to be censured and Glickstein agreed to a $100000 civil monetary penalty a five-year industry bar79

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 18

On September 30 2015 the SEC instituted a settled AP against investment adviser Securus Wealth Management LLC (Securus) and James Goodland its President and Chief Compliance Officer for violations of Section 203(e) of the Advisers Act The SEC claimed that Goodland failed to properly supervise Howard Richards an advisory representative associated with Securus Richards had purportedly been engaged in a scheme to support the market price of the common stock of Gatekeeper USA Inc (Gatekeeper) in order to help Gatekeeper obtain financing From 2010ndash2013 Richards allegedly manipulated Gatekeeperrsquos share price by using his clientsrsquo accounts to purchase shares at higher prices when Gatekeeperrsquos stock price fell below a certain level until eventually these accounts held over $1 million in Gatekeeper shares Goodland was Richardsrsquos direct supervisor and allegedly failed to follow up on several red flags including Richardsrsquos unusual trading in client accounts and numerous emails with a Gatekeeper insider80 Without admitting or denying the SECrsquos findings Securus was censured and Goodland consented to an industry bar and agreed to a civil monetary penalty of $30000

6 Private Equity

The SECrsquos enforcement activity in the private equity area in the second half of 2015 reflected the Commissionrsquos continuing focus on disclosures of fees and conflicts of interest

On October 7 2015 the SEC instituted settled APs against three related private equity funds and fund advisers regarding alleged breaches of fiduciary duties to investors for purportedly failing to disclose certain fee arrangements in violation of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Specifically the SEC alleged that the funds did not adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies before the companiesrsquo sales or initial public offerings Even though such acceleration of payments is relatively common the SEC claimed that these payments allegedly reduced the value of the portfolio companies before the sale which the SEC claimed harmed the funds and their investors Without admitting or denying the findings the funds agreed to pay $676 million consisting of $262 million in disgorgement $26 million in prejudgment interest a $10 million civil monetary penalty and $288 million for affected fund investors81

On November 3 2015 the SEC announced that Fenway Partners LLC (Fenway) a New York-based private equity firm and its current principals Peter Lamm and William Gregory Smart its former principal Timothy Mayhew Jr and its Chief Financial Officer Walter Wiacek agreed to settle claims that they allegedly failed to disclose conflicts of interest The SEC claimed that Fenway Lamm Smart Mayhew and Wiacek did not adequately disclose to clients and investors facts about among other things transactions with an affiliated entity for consulting services Without admitting or denying the SECrsquos findings the respondents agreed to pay $9417000 to settle the claims consisting of a payment of disgorgement by Fenway Lamm Smart and Mayhew of $7892 million and a payment by Fenway Lamm Smart Mayhew and Wiacek of $1525 million in penalties82

When considered together with the Commissionrsquos action against Kohlberg Kravis Roberts amp Co earlier in 2015 in which the SEC alleged that KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and other deals but did not allocate those expenses to KKRrsquos co-investors these actions suggest that private equity firms should continue to pay increasing attention to line-by-line expense disclosures as the SEC is taking a granular approach in its misallocation investigations

B Broker-Dealers

The SEC appears more focused on broker-dealers than at any point over the last ten years From FY 2005 to FY 2014 the last year for which data is available the number of broker-dealer enforcement cases nearly doubled from 94 to 16683 This focus continued during the second half of 2015 when the Commission brought enforcement actions against broker-dealers involving a wide range of misconduct including technical errors failures to satisfy broker-dealer reporting requirements and ldquospoofingrdquo Below are descriptions of certain of the most notable cases

1 Unregistered Sales of Securities

On July 23 2015 the SEC instituted settled APs against Scott A Eisler former registered representative at a New York-based investment bank branch manager Arthur W Lewis and supervisor and private client division head Robert Okin for allegedly participating in unregistered sales of penny stocks According to the SEC Eisler executed and Lewis approved or participated in the sales and despite red flags failed to make reasonable inquiries

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 19

into the propriety of the sales as required by the federal securities laws The SEC also alleged that Lewis and Okin failed to adequately supervise employees by ignoring red flags that suggested that the shares were not exempt from registration To settle the SECrsquos claims and without admitting or denying the allegations Eisler was barred from the securities industry associating with an investment company and participating in a penny stock offering for one year and agreed to pay a civil monetary penalty of $50000 Lewis was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $50000 and Okin was barred from acting as a supervisor for a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally recognized statistical rating organization for one year and agreed to pay a civil monetary penalty of $5000084

On August 5 2015 the SEC instituted a settled AP against Murat Dorkan for allegedly participating in the sale of unregistered bonds issued by Empire Corporation (Empire) The SEC claimed that from 2006 to 2010 Dorkan the president chairman and CEO of Empire Wilfred Azar III and an unnamed registered representative of Empire fraudulently raised more than $7 million from investors through the unregistered sale of Empire bonds The SEC further claimed that Azar paid Dorkan at least $143000 for selling these bonds Without admitting or denying the SECrsquos findings Dorkan agreed to be barred from associating with broker-dealers affiliating with registered investment companies and participating in penny stock sales Dorkan also agreed to pay $143000 in disgorgement $23593 in prejudgment interest and an $115000 civil monetary penalty85

On August 13 2015 the SEC instituted settled APs against Signator Investors Inc (Signator) a Boston-based registered broker-dealer and investment adviser and a Signator director Gregory J Mitchell for allegedly failing to identify and prevent a fraud conducted by Signator employees James R Glover and Cory D Williams The SEC claimed that Glover defrauded members of his religious community who were not financially sophisticated and relied on Glover for advice by enticing the religious community members to purchase partnership units in a real estate development called Colonial Tidewater Realty Income Partners LLC (Colonial

Tidewater) Glover and Williams allegedly provided false and misleading written statements about Colonial Tidewaterrsquos value and financial condition lied about the expected returns and failed to disclose the conflicts of interest posed by undisclosed commissions that Glover and Williams received when clients invested in the development Signator and Mitchell allegedly failed to identify and prevent the fraud carried out by Glover and Williams since Signator and Mitchell did not conduct thorough reviews or ensure that reasonable policies and procedures were in place The SEC claimed that Signator and Mitchell violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder Without admitting or denying the SECrsquos findings Signator agreed to pay a $450000 civil monetary penalty and Mitchell agreed to pay a $15000 civil monetary penalty and was barred from associating with a broker-dealer investment adviser municipal securities dealer municipal advisor transfer agent or nationally-recognized statistical rating organization for one year86

2 Spoofing

ldquoSpoofingrdquo is a practice in which traders attempt to trick other investors into buying and selling securities or commodities at artificially high or low prices by entering and quickly canceling large buy or sell orders on an exchange Spoofing is specifically forbidden under Dodd-Frank and in 2015 the SEC brought actions against traders who it claimed had engaged in spoofing to manipulate the prices of stocks and options

On October 8 2015 the SEC instituted a settled AP against Briargate Trading LLP a proprietary trading firm and one of its co-founders Eric Oscher alleging that they engaged in spoofing from October 2011 through September 2012 in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder Briargate and Oscher allegedly placed multiple large non-bona fide orders for certain stocks on the New York Stock Exchange (NYSE) before the exchange opened for trading The SEC claimed that Oscherrsquos orders moved the prices of the stocks and Oscher took advantage of the price movement by sending orders for the stocks on the opposite side of the market Without admitting or denying the SECrsquos findings Briargate agreed to pay a civil monetary penalty of $350000 Oscher agreed to pay a civil monetary penalty of $150000 and Briargate and Oscher agreed to pay $37842 in prejudgment interest87

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 20

On December 3 2015 the SEC instituted APs against three Chicago-based traders twin brothers Behruz Afshar and Shahryar Afshar and their friend Richard Kenny for allegedly circumventing market structure rules in a pair of options trading schemes The SEC alleged that the Afshar twins used two trading companies to take advantage of the fiscal incentives offered to non-professional traders which allowed orders from non-professional traders to get higher priority higher rebates and lower fees than trades from professionals The SEC claimed that the trio would run all trades for one quarter out of one company which would then be deemed a professional trader for the next quarter then shift to their second company which had been dormant in the previous quarter and thus identified as a customer According to the SEC by alternating between the two entities every quarter the Afshar brothers were able to consistently trade large volumes at customer rates

The SEC also alleged that the trio carried out a spoofing scheme from May 2011 through December 2012 designed to take advantage of the ldquomaker-takerrdquo program offered by an options exchange A maker-taker program is a pricing structure in which an exchange generally pays its members a per-share rebate to provide or ldquomakerdquo liquidity on the exchange and charges a fee to remove or ldquotakerdquo liquidity from the exchange The defendants allegedly carried out their scheme through All-Or-None options orders or orders that require a trader to use the whole option or not use the option at all According to the SEC the Afshars and Kenny placed smaller orders that were intended to alter the optionsrsquo best bid or trick other market participants into placing orders at the same price The SEC alleged that the Afshars and Kenny violated Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder88

3 Dark Pools

On August 12 2015 the SEC instituted settled APs against a broker-dealer and AlterNet Securities (AlterNet) for allegedly operating an undisclosed proprietary trading desk ldquoProject Omegardquo and misusing the confidential trading information of subscribers to the broker-dealerrsquos alternative trading system or ldquodark poolrdquo called POSIT AlterNet provides brokerage services to the broker-dealerrsquos customers through trading algorithms and order routers which send orders for execution to exchanges and dark pools including POSIT The broker-dealerrsquos customers submitted orders to buy and sell equity securities to POSIT and POSIT accepted matched and executed those orders

The SEC alleged that although the broker-dealer claimed to protect the confidentiality of its dark pool subscribersrsquo trading information for a period of eight months Project Omega accessed live feeds of POSIT subscribersrsquo order and execution information and used it to implement high-frequency algorithmic trading strategies including one in which it traded against subscribers in POSIT The SEC alleged that the failure to disclose Project Omega violated Section 17(a)(2) and (3) of the Securities Act The SEC further claimed that in failing to amend its Form ATS filings regarding Project Omega and related oversights in protecting confidential information the broker-dealer violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS The broker-dealer admitted wrongdoing and agreed to pay an $18 million civil monetary penalty $2081034 in disgorgement and prejudgment interest of $25653289

4 Compliance and Surveillance Safeguards

On August 19 2015 the SEC instituted a settled AP against an affiliate of a large international financial institution for allegedly failing to have adequate compliance and surveillance safeguards The alleged violations purportedly occurred from 2002 to 2012 Over this period the financial institution allegedly inadvertently diverted nearly half a million trades on behalf of its clients to an affiliated market maker which executed the trades as principal without the required disclosures Additionally the SEC claimed that these trades were not detected for two years because the financial institution relied on reports that failed to include information on principal transactions executed by affiliates The SEC alleged that the affiliate violated Section 15(g) of the Exchange Act and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder As part of the settlement the affiliate was censured and agreed to pay a $15 million in civil monetary penalty The affiliate also agreed to retain a compliance consultant 90 The affiliate also voluntarily remitted $25 million the profits from the principal transactions to its clients

On August 24 2015 OCIE released a risk alert that observed that certain broker-dealers had failed to enforce controls on retail sales of structured securities products (SSP) in violation of the broker-dealersrsquo duties of fair dealing91 Without naming any firms OCIE stated that it had examined ten branch offices of registered broker-dealers and analyzed over 26000 sales of SSPs totaling more than $125 billion in principal transactions

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 21

OCIE found that all of the examined firms failed to maintain andor enforce adequate controls relating to determining whether a particular SSP was in the best interests of the firmsrsquo customers In some instances OCIE claimed that these branches aggressively sold SSPs to elderly non-English speaking individuals and other conservative investors One branch purportedly put its investors in structured products in excess of the firmrsquos concentration guidelines local management approved these transactions without documenting any reasons why they were suitable for a particular investor This initiative and the resulting findings may foreshadow future enforcement actions

On September 29 2015 the SEC instituted a settled AP against a financial institution relating to its alleged failure to supervise a registered representative who directed customers to invest in the institutionrsquos affiliated mutual funds with money borrowed from an affiliated bank According to the SEC the use of such loans to buy securities was prohibited by both the institution and the affiliated bank The SEC further alleged that the office manager of the branch where the registered representative was employed accepted his explanation with no follow-up after being alerted to the possibility that such use was occurring and that the institutionrsquos policies were deficient in this regard Without admitting or denying the SECrsquos findings the institution agreed to pay $1188149 in disgorgement $174197 in prejudgment interest and a civil monetary penalty of $13637654 to be held in a fund for affected investors FINRA also announced an action against the institution on September 29 2015 for the firmrsquos alleged violation of FINRArsquos rules on supervision and principles of trade which the institution agreed to settle by paying a $75 million fine with interest on up to $11 million in restitution to more than 150 investors92

On October 8 2015 the SEC instituted a settled AP against Wolverine Trading LLC (WTL) a broker-dealer and Wolverine Asset Management LLC (WAM) an investment adviser (together Wolverine) for allegedly failing to maintain and enforce policies and procedures to prevent material nonpublic information from being disclosed in violation of Section 15(g) of the Exchange Act and Section 204A of the Advisers Act The SEC alleged that from February to March 2012 Wolverine repeatedly shared material non-public information with third parties despite their firmsrsquo policies and procedures on preventing the misuse of material non-public information The SEC also alleged that the sharing of information

revealed weaknesses in Wolverinersquos policies Without admitting or denying the SECrsquos findings WTL and WAM each agreed to pay $375000 in penalties and WAM will pay $36414580 in disgorgement along with $3915847 in prejudgment interest93

On September 30 2015 the SEC instituted a settled AP against a high-frequency proprietary trading firm regarding alleged violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (the Market Access Rule) and Rule 611(c) of Regulation National Market System (NMS) According to the SEC the trading firm allegedly sent around 126 million intermarket sweep orders (ISOs) for more than 46 billion shares that were not in compliance with Regulation NMS due primarily to a coding change made by another firm that introduced an error into the electronic trading infrastructure it shared with the trading firm Some of these orders were allegedly processed causing the trading firm to receive gross trading profits as well as rebates paid by stock exchanges According to the SEC the trading firm violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Regulation NMS Without admitting or denying the findings the trading firm agreed to pay a $5000000 civil monetary penalty disgorgement of $2784875 of gross trading profits and exchange-paid rebates and $268564 in prejudgment interest94

5 Market Manipulation

On September 10 2015 the SEC initiated a civil injunctive action against New York Global Group (NYGG) and its CEO Benjamin Wey for allegedly manipulating the stock of Chinese companies they were purporting to guide through the process of raising capital and becoming publicly-traded in the United States The complaint alleged that Wey and NYGG structured reverse mergers between clients and publicly-traded shell companies so that Wey and his family members could obtain ownership of the newly listed companies The SEC further alleged that to avoid detection Wey and his family members diverted their shares into several foreign accounts The sale of these securities allegedly generated tens of millions of dollars in illicit profits The complaint also names Weyrsquos wife Michaela Wey and sister Tianyi Wei as well as Weyrsquos Switzerland-based broker Seref Dogan Erbek The SEC also brought claims against two attorneys former Newman amp Morrison managing partner Robert Newman and former SEC attorney William Uchimoto for allegedly assisting in presentations to

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 22

underwriters and exchanges on behalf of the Chinese companies The SEC asserts that the defendants violated Sections 17(a) 17(a)(1)-(3) 15(b) of the Securities Act and Sections 10(b) 20(a) 20(e) 13(d) and 16(a) of the Exchange Act and Rules 10b-5 13d-1 16a-2 and 16a-3 thereunder The US Attorneyrsquos office for the Southern District of New York announced parallel criminal charges against Wey and Erbek95 The action is pending

6 Additional Miscellaneous Actions

On August 13 2015 the SEC announced that Edward Jones a St Louis-based brokerage firm and Stina R Wishman the former head of its municipal underwriting desk settled allegations that they overcharged customers in new municipal bonds sales Edward Jones and Wishman allegedly took new bonds into the firmrsquos inventory and improperly offered them to customers at higher prices instead of offering them to customers at the initial offering price Edward Jones also purportedly offered bonds at higher prices than in the initial offering process by waiting to offer the bonds to customers until after trading in the secondary market had begun which the SEC claimed caused the firmrsquos customers to pay at least $46 million more than they should have for the bonds To settle the case the firm agreed to pay more than $20 million including $52 million in disgorgement and prejudgment interest which will go to current and former customers who were overcharged Wishman agreed to pay a civil monetary penalty of $15000 and to be barred from the securities industry for at least two years Neither Edward Jones nor Wishman admitted or denied wrongdoing in the settlement Notably this was the SECrsquos first case against an underwriter for pricing-related fraud in the primary municipal bond market96

On September 8 2015 the SEC brought fraud claims against three traders Ross Shapiro Michael Gramins and Tyler Peters for alleged misstatements about the acquisition prices of certain residential mortgage-backed securities (RMBS) The SEC alleged that Shapiro Gramins and Peters defrauded investors to generate at least $5 million in revenues and violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Relatedly the SEC entered into deferred prosecution agreements with three other individuals who cooperated with the investigation and provided access to evidence that the SEC described as critical and which it claimed would not have been available otherwise In commenting on the

use of deferred prosecution agreements Michael Osnato Chief of the SECrsquos Complex Financial Instruments Unit said that ldquo[t]he SEC is open to deferring charges based on certain factors including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct The decision to defer charges in this matter reflects the early and sustained assistance provided by these individualsrdquo97

On September 17 2015 the SEC instituted settled APs against Philip A Pendergraft a co-founder and director of clearing firm Penson Financial Services Inc (Penson) Pensonrsquos CFO Kevin McAleer Penson director and CEO of Call Now Inc Thomas Johnson and Pensonrsquos CEO Charles Yancey for alleged improper accounting practices After suffering significant losses on margin loans to customers Penson allegedly delayed in reporting these losses contrary to accounting standards and then declared bankruptcy in 2013 The SEC claimed that the improper accounting practices also resulted in false filings with the SEC The order alleged violations of antifraud provisions Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 7(c) 13(a) 13(b)(2)(A) 13(b)(2)(B) 13(b)(5) 14(a) 17(a) and 17(e) of the Exchange Act Without admitting or denying the allegations Pendergraft agreed to be barred from the securities industry with the option to apply for reinstatement after an unspecified period of time McAleer agreed to a bar from appearing before the SEC for at least one year and Yancey agreed to a six-month suspension from association in a supervisory capacity with any broker dealer investment adviser municipal securities dealer municipal adviser transfer agent or nationally recognized statistical rating organization Pendergraft ($100000) McAleer agreed to ($25000) Johnson ($25000) and Yancey ($25000) agreed to pay civil monetary penalties98

On September 28 2015 the SEC instituted a settled AP against an affiliate of a large financial institution for allegedly submitting deficient blue sheet data to the SEC for two years in violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder As noted above in Section IIC the respondent admitted that from January 2012 to January 2014 it made at least 593 deficient blue sheet submissions to the SEC After discovering the issue the respondent implemented remedial measures to ensure the accuracy of its blue sheets notified the SEC that it had corrected and fully remediated the errors The respondent consented to a censure agreed to pay a $425 million civil monetary penalty and admitted

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 23

that it violated the recordkeeping and reporting provisions of the federal securities laws In announcing the settlement Sharon B Binger Director of the Philadelphia Regional Office stated that ldquo[a]ccurate and complete blue sheet data is essential to the Commissionrsquos efforts to detect many forms of unlawful conduct We will continue to hold broker-dealers who fail to comply with their obligation to provide the Commission with reliable blue sheet data accountable for their failurerdquo99

On October 13 2015 the SEC instituted a settled AP against a financial institution for allegedly making false or misleading statements and omissions in offering documents regarding structured notes linked to a foreign currency index in violation of Section 17(a)(2) of the Securities Act According to the allegations the institution misleadingly stated that the investment relied on a transparent and systematic currency trading strategy using market prices to calculate the financial instruments underlying the index but did not disclose that it would charge mark-ups and execute hedging trades with non-systematic spreads and trades in advance of certain hedging transactions which could negatively impact pricing inputs Without admitting or denying the SECrsquos findings the institution agreed to pay disgorgement and prejudgment interest totaling $115 million distribute $55 million of the disgorged funds to investors to cover the total investor losses and to pay an $8 million penalty100

On October 28 2015 the SEC instituted a settled AP against two former brokers Hal Tunick and Patrick Burke of Rochdale Securities a now-defunct brokerage firm The SEC alleged that Tunick and Burke failed to fulfill their duty to provide their clients with best execution which requires a broker-dealer to obtain the most favorable terms for a customer under the circumstances of the transaction Tunick and Burke allegedly arranged for orders to be performed by proprietary traders which caused their customers to pay higher prices to buy and receive lower prices to sell securities and allowed to Tunick and Burke to receive larger commissions The SEC alleged that Tunick and Burke violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Without admitting or denying the allegations Tunick agreed to a bar from the securities industry and to pay a civil monetary penalty of $125000 and Burke agreed to a bar from the securities industry for a period of at least five years and to pay $56959 in disgorgement and prejudgment interest101

C Insider Trading

The Second Circuitrsquos landmark insider trading decision in United States v Newman has not slowed the SECrsquos pursuit of alleged insider trading violations The Commission filed insider trading actions against 87 individuals and entities in FY 2015102 a slight increase over the 80 people against whom it brought insider trading claims in FY 2014 Although Newman did not reduce the volume of insider trading actions it may have caused a shift in the types of insider trading cases brought by the SEC The actions pursued during the second half of 2015 generally appeared to be traditional insider trading cases involving tipping or clear misappropriation of information before corporate transactions or announcements with few of the aggressive theories pursued in prior years against expert networks and hedge funds Below are the summaries of three of the highest profile cases

On August 11 2015 the SEC charged 32 defendants with insider trading in connection with an alleged scheme to trade on the basis of information in stolen corporate earnings announcements The SEC alleged that for a period of five years two Ukrainian nationals Ivan Turchynov and Oleksandr Ieremenko used ldquoadvanced techniquesrdquo to hack into multiple newswire services and steal hundreds of corporate earnings announcements before the announcements were publicly released Turchynov and Ieremenko then transmitted the stolen announcements to traders in traders in Russia Ukraine Malta Cyprus France and three US states Georgia New York and Pennsylvania The traders then allegedly traded on the nonpublic information and reaped over than $100 million in profits The United States Attorneys for the Eastern District of New York and District of New Jersey announced criminal charges against Turchynov and Ieremenko and Arkadiy Dubovoy Igor Dubovoy Pavel Dubovoy Vitaly Korchevsky Vladislav Khalupsky Aleksandr Garkusha and Leonid Momotok who traded in the Ukraine 103 On September 14 a Ukraine based investment banking firm and its CEO agreed to pay $30 million to settle charges against them in connection with the hacking scheme 104 The cases against the remaining defendants are pending

On August 13 2015 the SEC filed a civil action in federal court in the SDNY against Cedric Cantildeas Maillard a former adviser to the CEO of a Spanish bank alleging that Cantildeas traded in connection with a proposed acquisition for which the bank was acting as adviser and underwriter Specifically the SEC alleged that Cantildeas learned that a

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 24

global natural resources company had engaged the bank to advise on and underwrite a proposed acquisition of a Canadian commercial producer of nitrogen phosphate and potash According to the SEC the day before the target company rejected the potential acquirerrsquos bid Cantildeas and a close friend purchased call options in the target company The target companyrsquos stock rose 27 after it rejected the bid and Cantildeas allegedly reaped illicit profits of $27815697 The SEC asserts that Cantildeas violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and seeks disgorgement with prejudgment interest and penalties105

On October 23 2015 the SEC announced a settlement with an insider trading defendant who allegedly received illegal tips about pending corporate transactions via napkins or post-it notes exchanged at Grand Central Terminal As previously reported in our 2014 Year-End Enforcement Review 106 Vladimir Eydelman a former stockbroker allegedly received inside information regarding pending corporate transactions from a law firm employee Steven Metro who transmitted the information to Eydelman through a mutual friend Frank Tamayo The SEC alleged that Tamayo provided the information to Eydelman via notes exchanged in person and thereafter Tamayo would eat the notes and Eydelman would then trade and create a false paper trail that appeared to justify the trades Eydelman paid $1383550 to settle claims for violations of Section 17(a) of the Securities Act and Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder consisting of $1236657 in disgorgement (which was deemed satisfied by orders of forfeiture or restitution in a parallel criminal case) a $1236657 civil monetary penalty and $146893 in prejudgment interest107

D Financial Reporting Fraud

The SEC has increased the number of financial reporting fraud actions it has pursued every year since Chair White announced the creation of the Financial Reporting and Audit Task Force on July 2 2013108 In FY 2015 the SEC brought 134 accounting-fraud enforcement actions a 37 increase over the 99 reporting fraud actions it brought in FY 2014109 The SECrsquos focus on financial reporting fraud is reflected in the breadth of actions it brought in the second half of 2015 including actions involving allegations of stock price manipulation channel stuffing fallout from the financial crisis and the failure to implement adequate accounting controls These enforcement actions help shed light on current SEC trends

ndash the SEC has been targeting not just issuers but also individuals and is pursuing enforcement in connection with both large-scale violations and more minor infractions Below are summaries of some of the more significant actions from the second half of 2015

On August 6 2015 the SEC instituted a contested AP against Miller Energy Resources Inc (Miller Energy) its former CFO Paul Boyd and its current COO David Hall for allegedly inflating the values of Miller Energyrsquos oil and gas properties resulting in allegedly fraudulent financial statements The SEC claimed that after acquiring oil and gas properties in Alaska in 2009 Miller Energy boosted the companyrsquos net income and total assets by overstating the value of those properties by more than $400 million The SEC further alleged that the inflated valuation resulted in the companyrsquos eventual listing on the NYSE where the stock value peaked at nearly $9 per share The SEC alleged that Miller Energy and Boyd violated Sections 10(b) and 17(a) of the Exchange Act and Rule 10b-5 thereunder that Miller Energy violated Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and various rules thereunder and that Boyd aided and abetted Miller Energyrsquos violations Boyd and Hall are also alleged to have violated Section 13(b)(5) of the Exchange Act and Boyd was alleged to have violated Rule 13a-14 thereunder110 The action is pending

On August 17 2015 the SEC instituted a settled AP against two affiliates of a large financial institution for allegedly misleading hedge fund investors in the run-up to the financial crisis According to the SEC between 2002 and 2007 the affiliates marketed two funds as safe investments akin to ldquobond substitutesrdquo and raised nearly $3 billion from qualified investors The SEC claimed that contrary to the affiliatesrsquo representations however the funds were risky and highly leveraged and in 2007 one fund was forced to sell $2 billion in assets to meet margin calls Despite ongoing liquidity problems the affiliates allegedly continued to market the funds as safe investments The SEC alleged that the affiliates violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder Without admitting or denying the allegations the affiliates agreed to pay nearly $140 million in disgorgement and $40 million in prejudgment interest111 As discussed in Section IID above the SEC also granted the affiliatesrsquo parent a large financial institution a waiver from the disqualification provisions of the federal securities laws

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 25

that would have otherwise been triggered by the settlement

On September 8 2015 the SEC instituted a settled AP against MusclePharm Corporation (MSLP) a sports supplements and nutrition company its CEO Brad Pyatt Donald Prosser audit committee chair and former CFOs Gary Davis and Lawrence Meer for alleged accounting and disclosure violations including the claimed failure to properly report as compensation nearly a half-million dollars spent on executive perks such as golf club memberships private jet use and vehicles Despite initiating an internal review of the undisclosed perks MSLP allegedly continued to file inaccurate financial statements that omitted the perks The SEC also charged that MSLP issued stock without a registration statement where third parties agreed to pay cash to MSLPrsquos vendors in exchange for MSLP shares

The SEC claimed that MSLP violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act Rule 302 of Regulation S-T and Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 and 12b-20 thereunder The SEC further claimed that Pyatt Meer Davis likewise violated Sections 17(a)(2) 17(a)(3) 5(a) and 5(c) of the Securities Act and Rule 13b2-2 of the Exchange Act and caused MSLP to violate Sections 14(a) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 14a-9 13a-1 13a-13 13b2-1 and 12b-20 thereunder Finally the SEC claimed that Prosser caused MSLPrsquos violations of Sections 14(a) 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 14a-9 13a-1 and 12b-20 thereunder

MSLP paid a $700000 penalty and agreed to an independent monitor for one year without admitting or denying the SECrsquos findings Pyatt paid a $150000 penalty Prosser and Davis paid $30000 penalties and Meer and Davis were suspended from practicing as accountants all without admitting or denying the SECrsquos findings112 The SEC highlighted its pursuit of the individuals when in announcing the settlement Director Ceresney said ldquoProsser MusclePharmrsquos audit committee chair subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired resulting in an incorrect disclosurerdquo

On September 8 2015 the SEC instituted a settled AP against Bankrate Inc (Bankrate) and Hyunjin Lerner its former vice president of finance for allegedly fraudulently

manipulating the companyrsquos financial results The SEC claimed that Edward DiMaria then-CFO of Bankrate Matthew Gamsey then-director of accounting and Lerner fabricated revenues and avoided booking certain expenses to meet analyst estimates for key financial metrics such as adjusted earnings before interest taxes depreciation and amortization As a result Bankrate allegedly overstated its net income for the second quarter of 2012 and the stock rose as a result More specifically the SEC alleged that DiMaria Lerner and Gamsey directed the insurance and credit cards divisions to book improper revenue without any support and lied to Bankratersquos auditor regarding the improper entries As a result Bankrate allegedly violated Section 17(a) of the Securities Act and Sections 10(b) 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5 13a-11 13a-13 and 12b-20 thereunder The SEC further claimed that Lerner (1) violated Section 17(a) of the Securities Act and Sections 10(b) 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 and 13b2-2 thereunder and (2) willfully aided and abetted and caused the Bankratersquos violations Bankrate and Lerner agreed to pay $15 million and $150000 in penalties respectively without admitting or denying the Commissionsrsquo findings Lerner has also agreed to disgorge $30045 in illicit profits that he obtained from selling Bankratersquos stock after the financial results at issue were announced The litigation against DiMaria and Gamsey continues113

On September 8 2015 the SEC initiated a civil injunctive action in the SDNY against KIT Digital Incrsquos (KIT) then-CEO Kaleil Isaza-Tuzman and then-CFO Robin Smyth for allegedly falsifying financial statements to make the company appear more profitable 114 Allegedly Isaza-Tuzman and Smyth employed a number of schemes to manipulate KITrsquos books and mislead investors including using an off-the-books slush fund to generate payments back to the company and create the false appearance that KIT was being paid for its products Purportedly the defendants violated Section 17(a) of the Securities Act Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5 13b2-1 13b2-2 and 13a-14 Additionally the defendants are charged with aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 13a-1 13a-11 and 13a-13 thereunder The SEC is seeking disgorgement prejudgment interest and penalties as well as permanent injunctive relief and officer-and-director bars

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 26

On September 16 2015 the SEC instituted a settled AP against Joseph F Apuzzo a CPA under Rule 102(e) of the Commissionrsquos Rules of Practice 115 Apuzzo allegedly helped former officers of United Rentals Inc (URI) improperly recognize revenue from two fraudulent sale-leaseback transactions between URI and a heavy equipment manufacturer whereby URI would sell equipment to a financing company lease it back for an eight-month period use the manufacturer to remarket the equipment (and guarantee the financing company 96 of the equipmentrsquos purchase price) and then secretly contract with the manufacturer to assume the remarketing obligations and price guarantees itself According to the SEC these sale-leaseback agreements allowed URI to file materially false and misleading financial statements and Apuzzo knew of the fraudulent conduct when he helped facilitate it Without admitting or denying the findings Apuzzo consented to an order imposing remedial sanctions including a civil penalty of $100000 for violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder The Commission also barred Apuzzo indefinitely from appearing or practicing before it as an accountant with eligibility to request reinstatement after five years

On September 22 2015 the SEC instituted a settled AP against Stein Mart Inc116 alleging that from at least 2010 to November 2012 Stein Mart materially misstated its pre-tax income for certain quarters by improperly valuing inventory subject to price discounts or markdowns Stein Mart allegedly used three types of markdowns one of which did not value the inventory in accordance with GAAP causing Stein Mart to materially overstate its pre-tax income by almost 30 The SEC alleged violations of the Exchange Act including Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B) as well as violations of Exchange Act Rules 12b-20 13a-1 13a-11 and 13a-13 Without admitting or denying the allegations Stein Mart agreed to pay an $800000 civil monetary penalty

On September 25 2015 the SEC filed suit in the Southern District of Florida against four former SMF Energy Corp officers mdash Richard E Gathright (CEO) Michael S Shore (CFO) Laura P Messenbaugh (Chief Accounting Officer) and Robert W Beard (senior vice president of sales and investor relations officer) mdash for allegedly violating and aiding and abetting violations of Section 17(a) of the Securities Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 13b2-1 and 13b2-2 117 The SEC alleged that SMF overbilled

customers including the United States Postal Service by charging for undelivered fuel and adding surcharges not permitted by the customersrsquo contract Consequently SMF purportedly materially overstated its revenues profit margins shareholdersrsquo equity and net income as well as understated its liabilities in several of its SEC filings The SEC is seeking disgorgement monetary penalties and prejudgment interest as well as an officer and director bar against the each of the four former officers and permanent injunctive relief

On September 28 2015 the SEC filed a settled AP against Trinity Capital Corporation (Trinity) its wholly owned subsidiary Los Alamos National Bank (Los Alamos) and Trinityrsquos former CEO William Enloe former Chief Credit Officer Jill Cook former Senior Lending Officer Mark Pierce former CFO Daniel Bartholomew and VP of Internal Audit Karl Hjelvik in connection with Trinity and Los Alamosrsquos alleged material misstatements of their provisions for loan losses The SEC claimed that Enloe Cook Pierce Bartholomew and Hjelvik conspired to avoid reporting loan losses during the financial crisis by misreporting income to shareholders and regulators concealing an increase in problem loans and hiding the damaged nature of the bankrsquos portfolio The SEC further alleged that the bank hid problems with its loan portfolio by refusing to downgrade loans on a timely basis failing to designate loans as impaired failing to measure impairment properly and purposely overvaluing real estate it owned In some cases the SEC alleged the bank extended credit to troubled borrowers to make required payments on existing debt This was allegedly done so the borrower appeared current on loan payments when in fact the bank was not making any collections on the loans The SEC found Trinity Enloe Cook Pierce Bartholomew and Hjelvik violated Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 13(a) of the Exchange Act and Rules 13a-1 13a-13 and 12b-20 thereunder and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act118

Without admitting or denying the findings Trinity agreed to provide ongoing cooperation to the SEC and pay a $15 million in civil monetary penalty an amount the SEC claimed took into account the companyrsquos significant cooperation during the investigation Enloe who also did not admit or deny the findings agreed to a $250000 penalty and a five-year bar from serving as an officer or director of a public company Bartholomew and Hjelvik admitted to books and records violations and entered into

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 27

cooperation agreements with the SEC to assist in the Commissionrsquos actions against Cook and Pierce The pending charges against Cook and Pierce allege various violations of Sections 5(a) and 5(c) 17(a)(l) and 15(b) of the Securities Act Sections 9(a)(1) and 20(e) of the Exchange Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder

On September 30 2015 the SEC filed civil injunctive proceedings against the CEO and CFO of ContinuityX Solutions Inc an Internet service sales company alleging revenue inflation in violation of Sections 17(a)(1) 17(a)(2) and 17(a)(3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and related rules According to the SEC almost 99 of the $272 million in the companyrsquos reported revenue came from fraudulent and fictitious sales Anthony G Roth (CFO) and David P Godwin (CEO) allegedly used the SEC filings containing the fraudulent financials to raise millions from investors and derived personal financial gains of up to $13 million in compensation for Godwin and $351800 in compensation for Roth as well as $456098 of profits from ContinuityX stock sales The SEC seeks disgorgement with interest monetary penalties and permanent injunctions against future violations of the federal officer and director bar and reimbursement to the company of bonuses incentive and equity-based compensation and stock sale profits119

On October 5 2015 the SEC instituted a settled AP against Home Loan Servicing Solutions Ltd (HLSS) for alleged material misstatements about related-party transactions and the valuation of its primary asset as well as for inadequate internal accounting controls Allegedly from 2012 to 2014 HLSS disclosed in SEC filings that it had conflicts of interest policies that required its chairman to recuse himself from transactions with related parties However the SEC claimed that HLSS had no written policy requiring recusal for related-party transactions and its chairman had approved many transactions between HLSS and another mortgage loan servicing company whose Chairman also served as HLSSrsquos Chairman Further HLSS allegedly misstated its net income in 2012 2013 and the first quarter of 2014 because the accounting methodology used to value its primary asset mdash mortgage servicing rights purchased from the other mortgage loan servicing company mdash did not comply with GAAP Without admitting or denying the SECrsquos findings HLSS agreed to a settlement consenting to pay a $15 million penalty120

Relatedly on January 20 2016 the SEC instituted a settled AP against the other mortgage loan servicing company involved in the transactions with HLSS Like HLSS the mortgage servicer allegedly misstated in its SEC filings that it had a written recusal policy for related-party transactions and its financial results in the last three quarters of 2013 and the first quarter of 2014 Without admitting or denying liability the mortgage servicer agreed to a settlement consenting to a cease-and-desist order and a $2 million penalty121

On October 6 2015 the SEC brought two separate actions in the Northern District of California against the former CEO of OCZ Technology Group Inc (OCZ) Ryan Petersen and the former CFO Arthur Knapp alleging that Petersen and Knapp inflated OCZrsquos revenue and gross margins in violation of Section 17(a) of the Securities Act Sections 10(b) and 13 of the Exchange Act and Rules 10b-5 12b-20 13a-1 13a-11 13a-13 13a-14 and 13b2-1 thereunder The SEC claimed that Petersen falsified OCZrsquos books and records and then certified the accuracy of OCZrsquos financial statements while hiding his conduct from OCZrsquos auditors and finance department The SEC further alleged that Knapp failed to implement sufficient internal accounting controls and instituted or maintained policies that resulted in OCZ recording transactions in a way that did not comply with GAAP Specifically the SEC claimed that Peterson mischaracterized sales discounts as marketing expenses and had employees create false documentation to conceal the scheme engaged in channel-stuffing with OCZrsquos largest customer by shipping more goods than the customer could sell in the normal course of business and concealed large product returns from OCZrsquos finance department and auditor so that those returns would not be recorded in OCZrsquos books and records Knapp settled with the SEC on October 23 2015 without admitting or denying the claims 122 The case against Petersen is ongoing and the SEC is seeking disgorgement a civil monetary penalty and an officer and director bar

On October 9 2015 the SEC instituted a settled AP against David Derrick Chairman and CEO of SecureAlert Inc (SecureAlert) In 2007 Derrick allegedly caused SecureAlert to enter into an exclusive distribution agreement wherein the distributor would not pay for the product if he was unable to sell it The SEC charged that Derrick shipped $2 million worth of merchandise to the distributor and then reported $1 million in sales revenue and a $1 million receivable even though the distributor

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 28

sold none of the product Derrick allegedly sought but was unable to obtain financing from a third party to make the payment for the accounts receivable and the SEC claimed that Derrick used personal funds to make the payment The SEC also alleged that SecureAlert made material misrepresentations regarding the transaction in public filings and to its independent auditor and that Derrick failed to implement adequate internal accounting controls for SecureAlert Without admitting or denying the findings Derrick agreed to be barred from acting as an officer or director of any issuer and to pay a monetary penalty of $232500123

On October 19 2015 the SEC instituted a settled AP against two advisory firms affiliated with a major financial institution for allegedly failing to disclose a change in investment strategy by a fund that the affiliates advised The SEC claimed that although the fundrsquos marketing materials stated that it primarily made investments in distressed debt in 2008 the fund purchased large quantities of credit default swaps which incurred substantial losses The SEC claimed that the change in investment strategy was not disclosed to investors The SEC found that the affiliates violated of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) thereunder The SEC also found that the affiliates caused violations of Section 34(b) of the Investment Company Act Without admitting or denying the Commissionrsquos allegations the affiliates agreed to pay $82 million in disgorgement $14 million in prejudgment interest a civil monetary penalty of $3 million and $49 million for investor compensation124

On October 27 2015 the SEC filed a settled AP against The St Joe Company (St Joe) a Florida-based real estate developer and landowner its former CEO William Greene former CFO William McCalmont former Chief Accounting Officer Janna Connolly and former Director of Accounting J Brian Salter for allegedly improperly accounting for the declining value of its residential real estate holdings during the financial crisis Greene McCalmont Connolly and Salter allegedly failed to ensure that the companyrsquos impairment testing of real estate developments included all costs and that the companyrsquos internal controls were properly applied Without admitting or denying the findings St Joe Greene McCalmont Connolly and Salter consented to the entry of an order against them The order found that they violated or caused the violation of various provisions of the federal securities

laws including the antifraud books and records and internal controls St Joe agreed to pay a $275 million civil monetary penalty to settle the SECrsquos claims Greene agreed to a $120000 penalty and disgorgement of $400000 plus prejudgment interest McCalmont agreed to a $120000 penalty and disgorgement of $180000 plus prejudgment interest Connolly agreed to a $70000 penalty and disgorgement of $60000 plus prejudgment interest Salter agreed to pay a $25000 penalty McCalmont Connolly Salter and former Director of Accounting Phillip Jones agreed to be suspended from appearing or practicing before the SEC as an accountant125

E Auditors

Consistent with its focus on accounting and financial fraud generally in the second half of 2015 the Commission continued to pursue its stated goal of holding auditors accountable for alleged misconduct 126 by bringing enforcement actions against auditors who it claims failed to recognize and respond appropriately to red flags or who violated auditor independence standards

On August 31 2015 the SEC instituted a settled AP against accounting firm Johnson Lambert LLP (Johnson Lambert) and CPA Bradley Scott Diericx for allegedly improper audits of two insurance companies Maven Assurance Ltd and Maven Life International Ltd (together Maven) Maven allegedly invested $95 million in the ldquoPrivate International Wealth Managementrdquo program created by investment manager Nikolai Battoo which funds were allegedly either lost or stolen by Battoo The SEC alleged that Johnson Lambert and Diericx failed to (i) exercise due professional care (ii) adequately staff audits (iii) obtain sufficient audit evidence regarding the existence and valuation of the purported investments and (iv) exercise professional skepticism by overlooking red flags and warnings As a result the respondents allegedly failed to discover that Mavenrsquos investments with Battoo either did not exist or had lost virtually all their value In the settlement neither Johnson Lambert nor Diericx admitted or denied the allegations Diericx was banned from practicing as a public accountant for three years and Johnson Lambert was censured but not fined Johnson Lambert was also required to review its written policies and procedures retain an independent consultant to evaluate its audit and interim review policies and procedures implement new training and professional development and not accept new clients for one year127

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 29

On September 4 2015 the SEC instituted a settled AP against external auditors Raymond Holmdahl and Kanako Matsumoto who allegedly violated the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice Holmdahl and Matsumoto performed the 2013 audit of investment advisory firm Summit Asset Strategies Investment Management (Summit) Summitrsquos CEO Chris Yoo allegedly misstated the value of certain fund assets to manufacture millions of dollars in illusory profits As a result the SEC claimed that Summitrsquos 2013 financial statements materially overstated the fundrsquos investment value The SEC alleged that the auditors failed to (i) obtain sufficient appropriate audit evidence about the existence of certain fund assets (ii) exercise appropriate professional judgment and professional skepticism and (iii) failed to properly supervise the financial statement audit Without admitting or denying the SECrsquos findings the respondents agreed to a three-year suspension from practicing accounting on behalf of any publicly traded company

The SEC also filed a separate fraud action against Yoo and Summit which had allegedly received undisclosed management fees based on the inflated asset valuations Both settled the SECrsquos claims without admitting or denying the allegations by agreeing to pay disgorgement of $889301 plus prejudgment interest of $104632 and a penalty of $150000 Another advisory firm owned by Yoo paid disgorgement of $8172914 plus prejudgment interest of $661175 and a penalty of $100000128

On September 9 2015 as noted above in Section IIC the SEC filed a settled AP against BDO USA LLP (BDO) and several of its auditors Sean C Henaghan John E Rainis James J Gerace Leland E Graul and Wendy M Hambleton arising out of audits by BDO of General Employment Enterprises Inc (GEE) in 2009 129 BDO purportedly learned that $23 million (roughly half of GEErsquos assets) had gone missing but later resurfaced BDO allegedly originally raised concerns over the financial statements but after the resignation of Ronald Heineman BDO withdrew its concerns and issued an audit report containing an unqualified opinion on the financial statements Allegedly BDO implemented inadequate audit procedures failed to obtain sufficient information and failed to exercise due professional care in violation of the Sections 4C 10A and 13(a) of Exchange Act and Rule 13a-1 thereunder as well as Rule 102(e) of the Commissionrsquos Rules of Practice As part of the settlement BDO admitted wrongdoing and agreed to pay

disgorgement of $536000 prejudgment interest of $76000 and a civil money penalty of $15 million Without admitting or denying the Commissionrsquos charges Henaghan Rainis Gerace Graul and Hambleton agreed to pay civil penalties ranging from $10000 to $30000 The SEC also filed suit against GEErsquos then-chairman of the board and majority shareholder Stephen B Pence who is a former US attorney and a former lieutenant governor of Kentucky for allegedly making materially misleading statements and omissions to BDOrsquos auditors130 The litigation against Pence is ongoing

On September 18 2015 the SEC instituted a settled AP against CPA Christopher D Whetman for allegedly conducting deficient audits for Idle Media Inc and La Paz Mining Corp The SEC asserted that Whetmanrsquos audit of La Paz ignored red flags indicating sham purchases and services between entities and failed to (i) resolve discrepancies in the audit evidence (ii) properly audit the companyrsquos cash resources and (iii) adequately respond to concerns about potential fraud by company executives In connection with Whetmanrsquos audit of Idle Media the SEC alleged that Whetman did not adequately vet a number of conclusions about Idle Mediarsquos corporate structure and failed to (i) prepare and retain adequate audit documentation (ii) exercise professional due care (iii) obtain sufficient competent evidentiary material (iv) apply heightened scrutiny to related party transactions and (v) issue accurate audit reports The SEC found that Whetman violated Sections 17(a)(1) (2) and (3) of the Securities Act engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(E)(1)(ii) of the SECrsquos Rules of Practice and caused a violation of Rule 2-02(b)(1) of Regulation S-X Whetman consented to a five-year bar from appearing before the SEC as an accountant and to a civil monetary penalty of $15000131

On October 1 2015 the SEC instituted settled APs against Grant Thornton India LLP (GTI) and Grant Thornton Audit Pty Limited (GTA) alleging that they violated auditor independence rules including Rule 2-02(b)(1) of Regulation S-X and improper professional conduct rules including Sections 4C(a)(c) and 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commissionrsquos Rules of Practice and caused their client to violate several provisions of the federal securities laws as well According to the SEC Grant Thornton Mauritius (GTM) partners sat on the boards of subsidiaries of clients audited by GTA Through a third company Anex the GTM

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 30

partners allegedly provided prohibited services for the audit clients including controlling bank accounts and acting on the clientsrsquo behalf The GTI and GTA also allegedly failed to follow parent company Grant Thornton Internationalrsquos compliance control procedures regarding independence relationship checks resulting in Grant Thornton International GTI and GTA not discovering the violations until several months or even years later The SEC alleged specifically that GTA failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations as required by Grant Thornton International and GTI failed to obtain a confirmation letter Without admitting or denying the claims the GTI and GTA agreed to pay $365085 in disgorgement and penalties132

On December 10 2015 the SEC instituted a settled AP against CPAs Peter Messineo Robin Bigalke Joseph Mohr Richard Confessore and Charles Klein and two auditing firms Messineo amp Co LLC (MampC) and DKM Certified Public Accountants Inc (DKM) Allegedly Messineo and his firm skipped mandatory quality reviews for their audits and Bigalke falsified and backdated documents to cover up the violations Further the SEC asserted that Messineo served as the CFO of two public companies that were audited by Klein and that Confessore served as both a member of the DKM audit team and an employee of MampC Messineo allegedly certified company filings despite knowing that Confessorersquos conflicting roles violated auditor independence rules The SEC found that the defendants violated Sections 13 15 and 16 of the Exchange Act and rules promulgated thereunder as well as Rule 2-02 of Regulation S-X Messineo and MampC agreed to pay a civil monetary penalty of $25000 and were permanently barred from practicing as accountants on behalf of any SEC-regulated entity Mohr and Bigalke were suspended for at least four and three years respectively and Klein and DKM agreed to disgorgement of $33000 prejudgment interest of $204387 and a $25000 penalty Both were also suspended for at least two years Confessore agreed to a $15000 penalty and a suspension of at least two years133

F Foreign Corrupt Practices Act

After a busy 2014 in which the SEC brought seven FCPA enforcement actions on its own and six more jointly with the DOJ the Commission maintained a similar pace in 2015 bringing 12 FCPA enforcement actions including ten corporate enforcement actions alone134 The SECrsquos

corporate enforcement activity was striking because it coincided with a slowdown in corporate enforcement by the DOJ which brought only two such actions in 2015 down from nine in 2014 In addition to the high volume the SEC notably brought an action that expanded the definition of receiving ldquovaluerdquo under the FCPA to include summer internships and other employment opportunities which we describe below For an in-depth discussion of the SEC and DOJrsquos FCPA enforcement activity in 2015 please see our publication entitled FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act

On August 18 2015 the SEC instituted a settled AP against a major financial institution alleging FCPA violations related to hiring practices for internships The SEC alleged that the bank hired three interns in an effort to obtain or retain existing business from an unnamed Middle East sovereign wealth fund The SEC allegedly reviewed emails indicating that the bank hired the relatives of two government officials affiliated with the fund for a custom-tailored specially designed trainee program even though they did not meet the rigorous criteria the bank applied to other interns The SEC alleged that the bank violated Sections 30A and 13(b)(2)(B) of the Exchange Act Without admitting or denying liability the bank agreed to pay $148 million consisting of disgorgement of $83 million prejudgment interest of $15 million and a penalty of $5 million The SEC said that it agreed not to pursue additional penalties due to the bankrsquos cooperation135

G Crowdfunding

On October 13 2015 the SEC brought its first enforcement action for fraud in connection with a crowdfunding Web site The SEC alleged that Ascenery LLC (Ascenery) and its CEO Joseph Gabaldon engaged in offering fraud by using crowdfunding websites to solicit investors to purchase interests in oil and gas wells Although Ascenery and Gabaldon raised $5 million from investors the SEC claimed that only a few thousand dollars were used for oil and gas expenses Instead the SEC alleged that $12 million was used for other unrelated expenses and the remaining funds were transferred to Pyckl LLC 136 The SEC alleged that Ascenery and Gabaldon violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) The action is pending

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

Securities Enforcement 2015 Year-End Review Page 31

H Credit Ratings Agencies

On October 26 2015 the SEC announced a $581 million settlement with a large credit rating agency for allegedly misrepresenting the surveillance methodology it used to rate real estate securities Notably the SEC did not take issue with agencyrsquos actual ratings or its methodology Instead the SEC criticized what it claimed was the agencyrsquos lack of adherence to its own policies The agency allegedly told investors that it would use a three-step process on a monthly basis to monitor the ratings it assigned and would also subject its ratings to a monthly review by its surveillance committee The SEC alleged however that between 2009 and 2011 the agency only ran the first step of the three step process reviewing monthly remittance or performance data to identify underperforming loan pools each month According to the SEC the agency only took the second and third steps of the process deriving expected losses and running cash flow analyses when it convened a committee to review certain ratings because the agency did not have the staffing and technological resources to conduct all the reviews it promised to conduct The SECrsquos order found that the agency violated Sections 15E(b)(1)-(2) 15E(c)(3)(A) 15E(d)(1)(E) and 17(a) of the Exchange Act and Rules 17g-1(e) 17g-1(f) and 17g-2(a)(2)(iii) thereunder Without admitting or denying the findings the agency agreed to be censured and to retain an independent consultant to assess and improve its internal controls The firm also agreed to pay disgorgement of $2742 million plus prejudgment interest of $147482 and a civil monetary penalty of $2925 million137

V Conclusion The Commission continued to aggressively police the securities markets in 2015 In its annual financial report the SEC stated that in 2016 it will continue to focus on data to target and streamline its efforts while bringing actions involving complex financial products gatekeepers financial reporting market structure insider trading investment advisers and private funds and municipal securities Accordingly we expect that in 2016 the Commission will continue to pursue its priorities undeterred by the temporary setbacks and criticisms it faced in 2015

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

BROCHURE TITLE GOES HERE

1 SEC Press Release SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) httpwwwsecgovnewspressrelease2015-245html

2 Ed Beeson SEC Enforcement Surged To Record High In Fiscal Year 2015 Law360 Oct 22 2015 httpwwwlaw360comarticles717586sec-enforcement-surged-to-record-high-in-fiscal-year-2015

3 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 5

4 Jean Eaglesham and Andrea Fuller Wall Streetrsquos Top Cop Takes Harder Line Wall St J July 13 2015 httpwwwwsjcomarticlessec-escalates-financial-penalties-1436804327

5 Id

6 Ed Beeson SEC Enforcement Chief Says lsquoBroken Windowsrsquo Is Working Law360 Oct 15 2015 httpwwwlaw360comsecuritiesarticles715013nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

7 Julie Hirschfeld Davis The Most Diverse SEC Ever May Be Taking Shape NY Times Oct 20 2015 available at httpwwwnytimescom20151021businessdealbookthe-most-diverse-sec-ever-may-be-taking-shapehtml

8 Aruna Viswanatha amp Andrew Ackerman Shareholder Activism Expert Regulatory Critic Nominated for SEC Wall St J Oct 20 2015 available at httpwwwwsjcomarticleslaw-professor-ex-senate-aide-to-be-nominated-for-securities-and-exchange-commission-1445368894

9 See SEC Press Release SEC Proposed Changes to Amend Rules Governing Administrative Proceedings Sept 24 2015 available at httpwwwsecgovnewspressrelease2015-209html

10 Jean Eaglesham SEC Trims Use of In-House Judges Wall St J Oct 11 2015 available at httpwwwwsjcomarticlessec-trims-use-of-in-house-judges-1444611604

11 Flannery v SEC No 15-1080 2015 WL 8121647 at 7 (1st Cir Dec 8 2015)

12 Freytag v CIR 501 US 868 881 (1991) citing Buckley v Valeo 424 US 1 126 n 162 (1976)

13 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28

14 Order Hill v SEC No 15-cv-1801-LMM (ND Ga June 8 2015) ECF No 28 Order at 35-36 Gray Financial Group Inc et al v SEC No 15-cv-00492 (ND Ga Aug 4 2015) ECF No 56 see also Ironridge Global IV Ltd v SEC No 115-CV-2512-LMM (ND Ga Nov 17 2015)

15 Decision and Order Bebo v SEC No 15-cv-3 (ED Wis Mar 3 2015)

16 Opinion Jarkesy v SEC No 14-5196 (DC Cir Sept 29 2015)

17 See Spring Hill Capital Partners LLC v SEC No 15 Civ 4542 (SDNY June 29 2015) Tilton v SEC No 15-CV-2472 (RA) 2015 WL 4006165 (SDNY June 30 2015)

18 Order Tilton et al v SEC No 15-2103 (2d Cir Sept 17 2015)

19 See James B Stewart SEC Has a Message for Firms Not Used to Admitting Guilt NY Times June 21 2013 httpwwwnytimescom20130622businesssecs-new-chief-promises-tougher-line-oncaseshtml

20 In the Matter of OZ Management (Order Instituting Cease-and-Desist Proceedings) Admin Proc File No 3-16686 (July 14 2015) SEC Press Release OZ Management LP Admits Providing Inaccurate Data Impacting Brokersrsquo Records and lsquoBlue Sheetsrsquo Rel No 2015-145 (July 14 2015) available at httpwwwsecgovnewspressrelease2015-145html

21 SEC Press Release Scottrade Agrees to Pay $25 Million and Admits Providing Flawed ldquoBlue Sheetrdquo Trading Data Lit Rel 2014-17 Jan 29 2014 available at httpwwwsecgovNewsPressReleaseDetailPressRelease1370540696906

BROCHURE TITLE GOES HERE

22 In the Matter of BDO USA LLP Admin Proc File No 3-16800 (Sept 9 2015) available at httpwwwsecgovlitigationadmin201534-75862pdf SEC Press Release SEC Charges BDO and Five Partners in Connection With False and Misleading Audit Opinions Sept 9 2015 available at httpwwwsecgovnewspressrelease2015-184html see also Ed Beeson SEC Sends Warning to Gatekeepers with BDO Audit Case Law360 Sept 9 2015 available at httpwwwlaw360comarticles700993sec-sends-warning-to-gatekeepers-with-bdo-audit-case

23 See Shearman amp Sterling LLP Securities Enforcement 2015 Mid-Year Review (July 2015) at 7

24 Commissioner Daniel M Gallagher Why is the SEC Wavering on Waivers Remarks at the 37th Annual Conference on Securities Regulation and Business Law Feb 13 2015 available at httpwwwsecgovnewsspeech021315-spc-cdmghtml

25 See Commissioner Kara M Stein Dissenting Statement in the Matter of Deutsche Bank AG Regarding WKSI May 4 2015 available at httpwwwsecgovnewsstatementdissenting-statement-deutsche-bank-ag-wksihtml

26 SEC Press Release Citigroup Affiliates to Pay $180 Million to Settle Hedge Fund Fraud Charges available at httpwwwsecgovnewspressrelease2015-168html Ed Beeson Citi Paul Weiss Take Sting Out Of SECrsquos $180M Settlement Law360com available at httpwwwlaw360comarticles691941citi-paul-weiss-take-sting-out-of-sec-s-180m-settlement

27 Commissioner Kara M Stein Statement In The Matter Of JPMorgan Chase Bank NA Regarding Order Under 506(d) Of The Securities Act Of 1933 Granting A Waiver Of The Rule 506(d) (1) (iii) Disqualification Provision Dec 18 2015 available at httpwwwsecgovnewsstatementstatement-on-jpmorgan-chase-bank-12-18-2015html

28 SEC Press Release SEC Announces Whistleblower Award of More than $325000 No 2015-252 (Nov 4 2015) available at httpwwwsecgovnewspressrelease2015-252html

29 SEC 2015 Annual Report to Congress on the Dodd-Frank Whistleblower Program available at httpwwwsecgovwhistleblowerreportspubsannual-reportsowb-annual-report-2015pdf SEC Whistleblower Award

Proceeding File No 2015-7 (Sept 28 2015) available at httpswwwsecgovrulesother201534-76000pdf

30 SEC Whistleblower Award Proceeding File No 2015-8 (Sept 29 2015) available at httpswwwsecgovrulesother201534-76025pdf

31 Berman v NeoOgilvy LLC 801 F3d 145 147ndash148 n1 155 (2d Cir 2015)

32 Peter J Henning Who is a Whistle-Blower The Courts Weigh In NY Times Jan 5 2015 available at httpdealbooknytimescom20150105who-is-a-whistle-blower-the-courts-weigh-in

33 See 17 CFR 24021F-4(b) (7) 24021F-(6) (a) (4)

34 Complaint Romano v Santander Holdings USA Inc et al No 15-cv-07387 (TPG) (SDNY Sept 17 2015) ECF No 1

35 Ed Beeson Labaton Chases Whistleblower Record In JPMorgan Case Law360 (Dec 18 2015) available at httpwwwlaw360comsecuritiesarticles740057nl_pk=c6752e0f-e501-4d23-9da1-a57bb97ddfa3amputm_source=newsletteramputm_medium=emailamputm_campaign=securities

36 See Shearman amp Sterling LLP Securities Enforcement 2014 Mid-Year Review (July 2014) at 7

37 Allison Grande SECrsquos Latest Cybersecurity Exams a Tough Test for Wall St Law360 Sept 18 2015 available at httpwwwlaw360comarticles704173secrsquos-latest-cybersecutity-exams-atough-test-for-wall-st

38 SEC Division of Investment Management Cybersecurity Guidance No 2015-02 (April 2015) available at httpwwwsecgovinvestmentim-guidance-2015-02pdf

39 Commissioner Luis A Aguilar The Need for Greater Focus on the Cybersecurity Challenges Facing Small and Midsize Businesses Oct 19 2015 available at httpwwwsecgovnewsstatementcybersecurity-challenges-for-small-midsize-businesseshtml

40 In re RT Jones Capital Equities Management Inc Admin Proc File No 3-16827 (Sept 22 2015) httpswwwsecgovlitigationadmin2015ia-4204pdf

BROCHURE TITLE GOES HERE

41 Allison Grande SEC To Inspect Firmsrsquo Cybersecurity in 2nd Round of Exams Law360 Sept 16 2015 available at httpwwwlaw360comarticles703505sec-to-inspect-firms-cybersecurity-in-2nd-round-of-exams

42 United States v Newman 773 F3d 438 451-52 (2d Cir 2014)

43 Ed Beeson SEC Loses Insider Trading Case on Home Court Law360 Sept 14 2015 available at httpwwwlaw360comarticles702227sec-loses-insider-trading-case-on-home-court

44 SEC Press Release Steven A Cohen Barred From Supervisory Hedge Fund Role Rel No 2016-3 (Jan 8 2016) available at httpswwwsecgovnewspressrelease2016-3html In the Matter of Steven A Cohen Admin Proc File No 3-15382 (Jan 8 2016) available at httpswwwsecgovlitigationadmin2016ia-4307pdf

45 Order Salman v United States No 15-628 (US Jan 19 2015) available at httpwwwsupremecourtgovqp15-00628qppdf

46 US v Salman 792 F3d 1087 1093 (9th Cir 2015)

47 Ed Beeson SEC Chair White Looks to Calm Compliance Officer Nerves Law360 July 14 2015 available at httpwwwlaw360comarticles679186sec-chair-white-looks-to-calm-compliance-officer-nerves

48 Cara Salvatore SEC Official Seeks to Calm Compliance Prosrsquo Nerves Law360 Nov 4 2015 available at httpwwwlaw360comarticles723282sec-official-seeks-to-calm-compliance-prosrsquonerves

49 In the Matter of Judy K Wolf Admin Proc File No 3-16195 (Aug 5 2015) available at httpswwwsecgovaljaljdec2015id851cepdf

50 In the Matter of Parallax Investments et al Admin Proc File No 3-15626 (Aug 6 2015) available at httpwwwsecgovlitigationadmin201534-75625pdf

51 Carmen Germaine SEC Finds Outside Compliance Chiefs Asleep At The Switch Law360 Nov 9 2015 available at httpwwwlaw360comsecuritiesarticles724931sec-finds-outside-compliance-chiefs-asleep-at-the-switch

52 SEC Office of Compliance Inspections and Examinations Examinations of Advisers and Funds That Outsource Their Chief Compliance Officers (Nov 9 2015) available at httpassetslaw360newscom0724000724931ocie-2015-risk-alert-cco-outsourcingpdf

53 Koch v SEC 793 F 3d 147 (DC Cir 2015)

54 Daniel M Gallagher amp Michael S Piwowar Statement on Decision of the DC Circuit on Retroactive Collateral Bars SEC (July 22 2015) httpwwwsecgovnewsstatementstatement-decision-dc-circuitndashretroactive-collatehtml [httppermaccESP2-EEX6]

55 Montford amp Co Inc v SEC No 14-1126 (DC Cir July 10 2015)

56 In re Montford amp Co Inc SEC Admin Proc File No 3-14536 available at httpswwwsecgovlitigationopinions2014ia-3829pdf

57 15 USC sect 78d-5(a)(2)

58 United States v Litvak 14-2902-cr (2d Cir 2015)

59 SEC v Litvak 14-cv-132 (JCH) (D Conn)

60 In the Matter of Reliance Financial Advisors LLC Timothy S Dembski and Walter F Grenda Jr Admin Proc File No 3-16311 (July 31 2015) (order instituting admin and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9872pdf

61 In the Matter of Gold Mountain Management et al Admin Proc File No 3-16714 (Aug 4 2015) (order instituting admin and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin2015ia-4154pdf

62 In the Matter of Alpha Fiduciary Inc and Arthur T Doglione Admin Proc File No 3-16974 (Nov 30 2015) (instituting administrative and cease-and-desist proceedings) available at httpswwwsecgovlitigationadmin2015ia-4283pdf In the Matter of Michael L Shea Admin Proc File No 3-169745 (Nov 30 2015) (instituting administrative and cease-and-desist proceedings) available at httpswwwsecgovlitigationadmin201534-76528pdf

63 In the Matter of Dion Money Management LLC Adm Proc File No 3-16702 (July 24 2015) (order instituting

BROCHURE TITLE GOES HERE

administrative and cease-and-desist proceedings) available at httpswwwsecgovlitigationadmin2015ia-4146pdf

64 In re Matter of Tri-Star Advisors et al (order making findings and imposing remedial sanctions) available at httpwwwsecgovlitigationadmin2015ia-4160pdf

65 SEC Press Release Guggenheim Partners Investment Management LLC Settles Charges it Failed to Disclose Conflict to Clients Rel No 2015-162 (August 10 2015) available at httpwwwsecgovnewspressrelease2015-162html In the Matter of Guggenheim Partners Investment Management LLC Admin Proc File No 3-16735 (Aug 10 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin2015ia-4163pdf

66 SEC Litigation Release SEC v Lee D Weiss et al Rel No 23370 (Sept 29 2015) available at httpwwwsecgovlitigationlitreleases2015lr23370htm Complaint SEC v Weiss et al 115-cv-13460 (D Mass Sept 29 2015)

67 In the Matter of Focus Media Holding Ltd et al Admin Proc File No 3-16852 (Sept 30 2015) (order instituting cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9933pdf SEC Press Release China-Based Company and CEO To Pay $556 Million for Inaccurate Disclosures Rel No 2015-233 (Sept 30 2015) available at httpwwwsecgovnewspressrelease2015-223html

68 SEC Press Release SEC Charges Colorado Investment Firm and Its Manager with Fraud Rel No 23388 (Oct 16 2015) available at httpswwwsecgovlitigationlitreleases2015lr23388htm Complaint SEC v Lester et al 115-cv-02301 (D Colo Oct 16 2015) Thomas O Gorman Another SEC Offering Fraud Centered on Conflicts SEC Actions Oct 21 2015 available at httpwwwsecactionscomanother-sec-offering-fraud-centered-on-conflicts

69In the Matter of Welhouse amp Associates Inc and Mark P Welhouse File No 3-16657 (October 16 2015) (order making findings and imposing remedial sanctions) available at httpswwwsecgovlitigationadmin201534-75319pdf

70 In the Matter of Reid S Johnson Admin Proc File No 3-16730 (Aug 6 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-75626pdf

71 In the Matter of Parallax Investments LLC John P Bott II and F Robert Falkenberg Admin Proc File No 3-15626 (Aug 6 2015) (order making findings and imposing remedial sanctions and a cease-and-desist-order) available at httpwwwsecgovlitigationadmin201534-75625pdf

72 In the Matter of Sands Brothers Asset Management LLC et al Admin Proc File No 3-16223 (Nov 19 2015) (order instituting administrative proceedings making findings and imposing cease-and-desist order) available at httpswwwsecgovlitigationadmin2015ia-4273pdf

73 In the Matter of Taberna Capital Management LLC et al Admin Proc File No 3-16776 (Sept 2 2015) (order instituting admin and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-75814pdf SEC Press Release SEC Charges Advisory Firm With Fraud for Improperly Retaining Fees Rel No 2015-177 (Sept 2 2015) available at httpwwwsecgovnewspressrelease2015-177html

74 In re First Eagle Investment Management LLC Admin Proc File No 3-16823 (Sept 21 2015) available at httpswwwsecgovlitigationadmin2015ia-4199pdf

75 SEC Guidance Update Mutual Fund Distribution and Sub-Accounting Fees No 2016-01 (Jan 6 2016)

76 In the Matter of Retirement Investment Advisors Inc et al Admin Proc File No 3-16915 (Oct 21 2015) (order instituting cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-76218pdf

77 In the Matter of Cherokee Investment Partners LLC and Cherokee Advisers LLC Admin Proc File No 3-16945 (Nov 5 2015) (order instituting AP making findings imposing sanctions and cease-and-desist order) available at httpswwwsecgovlitigationadmin2015ia-4258pdf

78 In the Matter of Cranshire Capital Advisors LLC Admin Proc File No 3-16969 (Nov 23 2015) (order instituting administrative and cease-and-desist proceedings) available at httpswwwsecgovlitigationadmin2015ia-4277pdf

BROCHURE TITLE GOES HERE

79 In the Matter of G Asset Management LLC amp Michael A Glickstein Admin Proc File No 3-16831 (Sept 24 2015) (order instituting administrative and cease-and-desist proceedings) available at httpswwwsecgovlitigationadmin201533-9928pdf

80 In the Matter of James Goodland and Securus Wealth Management LLC Admin Proc File No 3-16878 (Sept 30 2015) (order instituting admin and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin2015ia-4213pdf In the Matter of Howard Richards Admin Proc File No 3-16877 (Sept 30 2015)(order instituting admin and cease-and-desist proceedings) available at httpswwwsecgovlitigationadmin201534-76058pdf

81 In the Matter of Blackstone Management Partners LLC et al Admin Proc File No 3016887 (Oct 7 2015) (order instituting cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin2015ia-4219pdf SEC Press Release Blackstone Charged With Disclosure Failures Rel No 2015-235 (Oct 7 2015) available at httpwwwsecgovnewspressrelease2015-235html

82 In the Matter of Fenway Partners LLC et al Admin Proc File No 3-16938 (Nov 3 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin2015ia-4253pdf SEC Press Release SEC Charges Private Equity Firm and Four Executives With Failing to Disclose Conflicts of Interest Rel No 2015-250 (Nov 3 2015) available at httpwwwsecgovnewspressrelease2015-250html

83 SEC Year-by-Year SEC Enforcement Statistics 2005-2014 available at httpswwwsecgovnewsnewsroomimagesenfstatspdf

84 SEC Press Release Former Oppenheimer Employees Settle Charges Involving Unregistered Sales of Penny Stocks Rel No 2015-153 (July 23 2015) available at httpwwwsecgovnewspressrelease2015-153html

85 In the Matter of Murat M Dorkan Admin Proc File No 3-16725 (Aug 5 2015) (order instituting administrative and cease-and-desist proceedings) available at httpswwwsecgovlitigationadmin201533-9878pdf

86 SEC Press Release Three Maryland Men Settle Charges They Defrauded Investors in Real Estate Investment Company Rel No 2015-167 (Aug 13 2015) available at httpwwwsecgovnewspressrelease2015-167html In the Matter of Signator Investors Inc amp Gregory J Mitchell Admin Proc File No 3-16753 (Aug 13 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-75690pdf

87 In the Matter of Briargate Trading LLC et al Admin Proc File No 3-16889 (Oct 8 2015) (order instituting cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9959pdf SEC Press Release SEC Charges Firm and Owner With Manipulative Trading Rel No 2015-236 (Oct 8 2015) available at httpwwwsecgovnewspressrelease2015-236html

88 In the Matter of Behruz Afshar et al Admin Proc File No 3-16978 (Dec 3 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9983pdf SEC Press Release SEC Announces Charges for Spoofing and Order Mismarking Rel No 2015-273 (Dec 3 2015) available at httpwwwsecgovnewspressrelease2015-273html

89 SEC Press Release SEC Charges ITG with Operating Secret Trading Desk and Misusing Dark Pool Subscriber Trading Information Rel No 2015-164 (Aug 12 2015) available at httpwwwsecgovnewspressrelease2015-164html In the Matter of ITG Inc and AlterNet Securities Inc Admin Proc File No 3-16742 (Aug 12 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9887pdf

90In the Matter of Citigroup Global Markets Inc Admin Proc File No 3-16764 (Aug 19 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-75729pdf

91 Ed Beeson SEC Spots Vast Problems In Retail Structured Product Sales Law360 Aug 24 2015 available at httpwwwlaw360combankingarticles694534utm_source=shared-articlesamputm_medium=emailamputm_campaign=shared-articles

92 SEC Press Release SEC Charges UBS Puerto Rico and Two Individuals in Actions Relating to Former Brokerrsquos Fraud Rel No 2015-217 (Sept 29 2015) available at

BROCHURE TITLE GOES HERE

httpwwwsecgovnewspressrelease2015-217html In the Matter of UBS Financial Services Incorporated of Puerto Rico Admin Proc File No 3-16846 (Sept 29 2015) (order instituting administrative proceedings) available at httpwwwsecgovlitigationadmin201534-76013pdf

93 In the Matter of Wolverine Trading LLC et al Admin Proc File No 3-16890 (Oct 8 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-76109pdf SEC Press Release Wolverine Affiliates Charged With Failing to Maintain Policies to Prevent Misuse of Material Nonpublic Information Rel No 2015-237 (Oct 8 2015) available at httpwwwsecgovnewspressrelease2015-237html

94 In the Matter of Latour Trading LLC Admin Proc File No 3-16851 (Sept 30 2015) (order instituting cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-76029pdf SEC Press Release Latour Trading Charged With Market Structure Rule Violations Rel No 2015-221 (Sept 30 2015) available at httpwwwsecgovnewspressrelease2015-221html

95 SEC Press Release SEC Announces Fraud Charges in Cross-Border Scheme to Secretly Control and Manipulate Stock of Chinese Companies After Reverse Mergers Rel No 2015-189 (Sept 10 2015) available at httpwwwsecgovnewspressrelease2015-189html Complaint SEC v Wey et al No 15-cv-07116 (SDNY Sept 10 2015)

96 SEC Press Release Edward Jones to Pay $20 Million for Overcharging Retail Customers in Municipal Bond Underwritings Rel No 2015-166 (Aug 15 2015) available at httpwwwsecgovnewspressrelease2015-166html

97 SEC Press Release SEC Charges Three RMBS Traders With Defrauding Investors Rel No 2015-181 (Sept 8 2015) available at httpwwwsecgovnewspressrelease2015-181html Complaint SEC v Shapiro et al No 15-cv-07045 (SDNY Sept 8 2015)

98 In the Matter of Philip A Pendergraft Admin Proc File No 3-16819 (Sept 17 2015) available at httpswwwsecgovlitigationadmin201533-9914pdf (order instituting administrative and cease-and-desist proceedings) SEC Press Release SEC Charges Clearing Firm Officials for Improper Margin Loans Accounting and Disclosure Failures

Rel No 2015-194 (Sept 17 2015) available at httpwwwsecgovnewspressrelease2015-194html

99 In the Matter of Credit Suisse Securities (USA) LLC Admin Proc File No 3-16835 (Sept 28 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-75992pdf Press Release Credit Suisse to Pay $425 Million and Admits to Providing Deficient ldquoBlue Sheetrdquo Trading Data Rel No 2015-214 (Sept 28 2015) available at httpwwwsecgovnewspressrelease2015-214html

100 In the Matter of UBS AG Admin Proc File No 3-16891 (Oct 13 2015) (order instituting cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9961pdf SEC Press Release UBS to Pay $195 Million Settlement Involving Notes Linked to Currency Index Rel No 2015-238 (Oct 13 2015) available at httpwwwsecgovnewspressrelease2015-238html

101 In the Matter of Patrick R Burke Admin Proc File No 3-16930 (Oct 28 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9968pdf In the Matter of Hal S Tunick Admin Proc File No 3-16931 (Oct 28 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9969pdf see also SEC Press Release SEC Bars Brokers Who Played Favorites to Double Their Commissions Rel No 2015-248 (Oct 28 2015) available at httpwwwsecgovnewspressrelease2015-248html

102 SEC SEC Announces Enforcement Results for FY 2015 Rel No 2015-245 (Oct 22 2015) available at httpswwwsecgovnewspressrelease2015-245html

103 SEC Press Release SEC Charges 32 defendants in Scheme to Trade on Hacked News Releases (Aug 11 2015) available at wwwsecgovnewspressrelease2015-163html

104 SEC Press Release SEC Obtains $30 Million from Traders who Profited on Hacked News Release Lit Rel No 23385 (Sept 14 2015) available at httpswwwsecgovnewspressrelease2015-191html

105 SEC Litigation Release SEC Files Case Against Former Banco Santander Official for Insider Trading Lit Rel No

BROCHURE TITLE GOES HERE

23316 (Aug 13 2015) available at httpwwwsecgovlitigationlitreleases2015lr23316htm Complaint SEC v Cedric Cantildeas Maillard No 15-cv-6380 (SDNY Aug 13 2015)

106 See Shearman amp Sterling LLP Securities Enforcement 2014 Mid-Year Review (January 2015) at 23

107 SEC Litigation Release SEC Announces Settlement with Stockbroker in Grand Central Post-It Notes Insider Trading Case Litig Rel No 23391 (Oct 23 2015) available at httpwwwsecgovlitigationlitreleases2015lr23391htm Complaint SEC v Vladimir Eydelman No 14-cv-01742 (DNJ Mar 19 2014)

108 SEC Chair Mary Jo White Chairmanrsquos Address at SEC Speaks 2014 (Feb 21 2014) available at httpwwwsecgovNewsSpeechDetailSpeech1370540822127_ftnref18

109 Kevin LaCroix SEC Files Record Number of Independent Enforcement Actions in Fiscal 2015 The DampO Diary Oct 25 2015 available at httpwwwdandodiarycom201510articlessecurities-litigationsec-files-record-number-of-independent-enforcement-actions-in-fiscal-2015

110 SEC Press Release Miller Energy Resources Former CFO Current COO Charged With Accounting Fraud Rel No 2015-161 (Aug 6 2015) available at httpwwwsecgovnewspressrelease2015-161html In the Matter of Miller Energy Resources Inc et al Admin Proc File No 3-16729 (Aug 6 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9881pdf

111 In the Matter of Citigroup Alternative Investments LLC et al Admin Proc File No 3-16757 (Aug 17 2015) (order instituting administrative and cease-and-desist proceedings) available at httpswwwsecgovlitigationadmin201533-9893pdf

112SEC Press Release SEC Charges Sports Nutrition Company With Failing to Properly Disclose Perks for Executives Rel No 2015-179 (Sept 8 2015) available at httpwwwsecgovnewspressrelease2015-179html In the Matter of MusclePharm Corporation Admin Proc File No 3-16788 (Sept 8 2015) (order instituting cease-and-desist

proceedings) available at httpwwwsecgovlitigationadmin201533-9903pdf In the Matter of Brad J Pyatt Admin Proc File No 3-16789 (Sept 8 2015) (order instituting cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9904pdf In the Matter of Lawrence S Meer CPA Admin Proc File No 3-16790 (Sept 8 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9905pdf In the Matter of L Gary Davis Admin Proc File No 3-16791 (Sept 8 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9906pdf In the Matter of Donald W Prosser CPA Admin Proc File No 3-16792 (Sept 8 2015) (order instituting cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-75855pdf

113 SEC Press Release SEC Charges Bankrate and Former Executives with Accounting Fraud Rel No 2015-180 (Sept 8 2015) available at httpwwwsecgovnewspressrelease2015-180html In the Matter of Bankrate Inc Admin Proc File No 3-16786 (Sept 8 2015) (order instituting cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9901pdf In the Matter of Hyunjin Lerner CPA Admin Proc File No 3-16787 (Sept 8 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9902pdf

114 SEC Press Release SEC Charges Video Management Company Executives With Accounting Fraud Rel No 2015-183 (Sep 8 2015) available at httpwwwsecgovnewspressrelease2015-183html Complaint SEC v Tuzman No 115-cv-07057 (SDNY Sep 8 2015)

115 In the Matter of Joseph F Apuzzo CPA Admin Proc File No 3-16815 (Sept 16 2015) (order instituting administrative proceedings making findings and imposing remedial sanctions) available at httpwwwsecgovlitigationadmin201534-75933pdf

116 In re Stein Mart Inc Admin Proc File No 3-16826 (Sept 22 2015) available at httpswwwsecgovlitigationadmin201534-75958pdf

BROCHURE TITLE GOES HERE

117 Complaint SEC v Gathright et al 015-cv-62028-XXXX (Sept 25 2015)

118 SEC Press Release SEC Charges Trinity Capital Corporation and Former Bank Executives With Accounting Fraud Rel No 2015-215 (Sept 28 2015) available at httpwwwsecgovnewspressrelease2015-215html In the Matter of Trinity Capital Corporation Admin Proc File No 3-16837 (Sept 28 2015) (order instituting cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9930pdf

119 Complaint SEC v Godwin et al No 115-cv-01414-JES-JEH (CD Ill Sept 30 2015) In the Matter of ContinuityX Solutions Inc Admin Proc No 3-16850 (Sept 30 2015) (order instituting proceedings pursuant to Section 12(j) of the Securities Exchange Act of 1934) available at httpwwwsecgovlitigationadmin201534-76028pdf SEC Press Release SEC Charges Executives for Defrauding Investors in Financial Fraud Scheme Rel No 2015-224 (Sept 30 2015) available at httpwwwsecgovnewspressrelease2015-224html

120 SEC Press Release SEC Charges Home Loan Servicing Solutions for Misstatements and Inadequate Internal Controls Rel No 2015-230 (Oct 5 2015) available at httpwwwsecgovnewspressrelease2015-230html In the Matter of Home Loan Servicing Solutions Ltd Admin Proc File No 3-16882 (Oct 5 2015) (order instituting cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-76074pdf

121 In the Matter of Ocwen Financial Corp Admin Proc File No 3-17060 (Jan 20 2016) available at httpwwwsecgovlitigationadmin201634-76938pdf

122 Complaint SEC v Ryan Petersen No 515-cv-04599 (ND Cal Oct 6 2015) Complaint SEC v Arthur F Knapp Jr 515-cv-04598 (ND Cal Oct 6 2015) SEC Press Release SEC Charges Former Executives With Accounting Fraud and Other Accounting Failures Rel No 2015-234 (Oct 6 2015) available at httpwwwsecgovnewspressrelease2015-234html In the Matter of Arthur F Knapp Jr File No 3-16919 (Oct 23 2015) (order instituting administrative proceedings) available at httpswwwsecgovlitigationadmin201534-76250pdf

123 In the Matter of David G Derrick Admin Proc File No 3-16213 (Oct 9 2015) (order making findings and imposing sanctions) available at httpswwwsecgovlitigationadmin201533-9960pdf

124 SEC Press Release Two UBS Advisory Firms Settle Charges Arising From Failure to Disclose Change in Investment Strategy Rel No 2015-241 (October 19 2015) available at httpwwwsecgovnewspressrelease2015-241html In the Matter of UBS Willow Management LLC and UBS Fund Advisor LLC Admin Proc File No 3-16909 (Oct 16 2015) (order instituting cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201533-9964pdf

125 SEC Press Release Developer Former Top Execs Charged for Improper Accounting of Real Estate Assets During Financial Crisis (Oct 27 2015) available at httpwwwsecgovnewspressrelease2015-247html In the Matter The St Joe Company et al Admin Proc File No 3-16927 (Oct 27 2015) (order instituting cease-and-desist proceedings) available at httpswwwsecgovlitigationadmin201533-9967pdf

126 SEC Press Release SEC Announces Enforcement Results For FY 2015 Rel No 2015-245 (Oct 22 2015) available at httpwwwsecgovnewspressrelease2015-245html

127 Order In the Matter of Johnson Lambert LLP and Bradley Scott Diericx CPA Admin Proc File No 3-16773 (Aug 31 2015) available at httpwwwsecgovlitigationadmin201534-75795pdf Complaint SEC v Battoo et al 12-cv-7125 (ND Ill Sept 5 2012)

128 In the Matter of Holmdahl amp Matsumoto Admin Proc File No 3-16783 (ordering instituting public administrative proceedings) (Sept 4 2015) available at httpwwwsecgovlitigationadmin201534-75843pdf SEC Press Release SEC Charges Seattle-Area Hedge Fund Adviser With Taking Unearned Management Fees Two Accountants Charged With Performing Deficient Audit of Fund Rel No 2015-178 (Sept 4 2015) available at httpwwwsecgovnewspressrelease2015-178html Complaint SEC v Summit Asset Strategies Investment Management LLC et al 15-cv-1429 (WD Wash Sept 4 2015)

BROCHURE TITLE GOES HERE

129 In the Matter of Sean C Henaghan CPA et al File No 3-16797 (Sep 9 2015) (order instituting public administrative and cease-and-desist proceedings making finding and imposing remedial sanctions and a case-and-desist order) available at httpswwwsecgovlitigationadmin201534-75859pdf

130 SEC Press Release SEC Charges BDO and Five Partners in Connection with False and Misleading Audit Opinions Rel No 2015-184 available at httpwwwsecgovnewspressrelease2015-184html see also Complaint SEC v Pence No 12-cv-7077 (SDNY Sept 9 2015)

131 In the Matter of Christopher D Whetman CPA Admin Proc File No 3-16821 (Sept 18 2015) (order instituting public administrative and cease-and-desist proceedings) available at httpswwwsecgovlitigationadmin201533-9920pdf

132 SEC Press Release SEC Charges Two Grant Thornton Firms With Violating Auditor Independence Rules Rel No 2015-225 (Oct 1 2015) available at httpwwwsecgovnewspressrelease2015-225html In the Matter of Grant Thornton India LLP Admin Proc File No 3-16879 (Oct 1 2015) (order instituting public administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-76065pdf In the Matter of Grant Thornton Audit PTY Limited Admin Proc File No 3-16880 (Oct 1 2015) (order instituting public administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-76066pdf

133 SEC Press Release SEC Suspends Public Accountants for Bad Auditing Rel No 2015-275 (Dec 10 2015) available at httpwwwsecgovnewspressrelease2015-275html In the Matter of Peter Messineo et al Admin Proc File No 3-16993 (Dec 10 2015) (order instituting public administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-76607pdf In the Matter of DKM Certified Public Accountants Inc et al Admin Proc File No 3-16994 (Dec 10 2015) (order instituting public administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-76608pdf In the Matter of Richard Confessore CPA Admin Proc File No 3-16995 (Dec 10 2015) (order instituting public administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-76609pdf In the Matter of Robin L Bigalke CPA Admin Proc File No 3-16996 (Dec 10 2015) (order instituting public administrative

and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-76610pdf In the Matter of Joseph E Mohr CPA Admin Proc File No 3-16997 (Dec 10 2015) (order instituting public administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-76611pdf

134 Shearman amp Sterling LLP FCPA Digest Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act (Jan 2016)

135 In the Matter of the Bank of New York Mellon Admin Proc File No 3-16764 (Aug 18 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-75720pdf

136 SEC Press Release SEC Halts Fraudulent Oil and Gas Crowdfunding Scheme and Obtains Asset Freeze Over Joseph ldquoJoeyrdquo Gabaldon and Ascenery LLC Rel No 23394 (Oct 28 2015) available at httpwwwsecgovlitigationlitreleases2015lr23394htm Complaint SEC v Ascenery LLC No 215-CV-01974 (D Nev Oct 13 2015)

137 In the Matter of DBRS Inc Admin Proc File No 3-16922 (Oct 26 2015) (order instituting administrative and cease-and-desist proceedings) available at httpwwwsecgovlitigationadmin201534-76261pdf SEC Press Release SEC Charges Credit Rating Agency With Misrepresenting Surveillance Methodology Rel No 2015-246 (Oct 26 2015) available at httpwwwsecgovnewspressrelease2015-246html

Securities Enforcement 2015 Year-End Review Page 32

Contacts

Partners

Hong Kong

Brian G Burke T +85229788040 brianburkeshearmancom

New York

Stuart J Baskin T +12128484974 sbaskinshearmancom

Matthew L Craner T +12128485255 matthewcranershearmancom

Agnegraves Dunogueacute T +12128485257 agnesdunogueshearmancom

Stephen Fishbein T +12128484424 sfishbeinshearmancom

Jerome S Fortinsky T +12128484900 jfortinskyshearmancom

Joseph J Frank T +12128485254 josephfrankshearmancom

Nathan J Greene T +12128484668 ngreeneshearmancom

Adam S Hakki T+12128484924 ahakkishearmancom

Daniel HR Laguardia T +12128484731 daniellaguardiashearmancom

Christopher L LaVigne T +12128484432 christopherlavigneshearmancom

John A Nathanson T +12128488611 johnnathansonshearmancom

Jeffrey J Resetarits T +12128487116 jeffreyresetaritsshearmancom

Claudius O Sokenu Editor-in-Chief T +12128484838 claudiussokenushearmancom

San Francisco

Patrick D Robbins T +14156161210 probbinsshearmancom

Washington DC

Mark D Lanpher Managing Editor T + 12025088120 marklanphershearmancom

Philip Urofsky T +12025088060 philipurofskyshearmancom

Associate Contributors

New York

K Mallory Brennan mallorybrennanshearmancom

Brittany Brudnicki brittanybrudnickishearmancom

Brian Calandra briancalandrashearmancom

Laura Caldwell lauracaldwellshearmancom

Johnston Chen johnstonchenshearmancom

Erica Embree ericaembreeshearmancom

Marion R Harris marionharrisshearmancom

Jeffrey D Hoschander jeffhoschandershearmancom

Dennis Kitt denniskittshearmancom

Benjamin Klebanoff benjaminklebanoffshearmancom

Christina Lee chrstinalee1shearmancom

Min Kyung Lee minkyungleeshearmancom

Alexander Lopez alexlopezshearmancom

Chad Remus chadremusshearmancom

Shaina Schwartz shainaschwartzshearmancom

Gina Seong ginaseongshearmancom

Becca Shieh beccashiehshearmancom

Washington DC

Andrew Huang andrewhuangshearmancom

Robert McCabe robertmccabeshearmancom

BROCHURE TITLE GOES HERE

ABU DHABI

BEIJING

BRUSSELS

DUBAI

FRANKFURT

HONG KONG

LONDON

MENLO PARK

MILAN

NEW YORK

PARIS

ROME

SAN FRANCISCO

SAtildeO PAULO

SAUDI ARABIA

SHANGHAI

SINGAPORE

TOKYO

TORONTO

WASHINGTON DC

shearmancom